401(k) Investors Not Diversified Enough

June 19, 2003, 1:00 a.m. EDT 1 Min Read

Many 401(k) investors are not well diversified, Reuters reports.

The research comes from outsourcing and consulting firm Hewitt Associates, which found that many investors in 401(k) programs do not hold a significant amount of varied stocks in their portfolios. Also, existing holdings were found to be heavily weighted towards stocks of their own employers, which has in the past few years seen disasterous consequences with cases such as Enron.

Because of this fact, financial experts have been long urging investors to diversify their portfolios to offset the potential losses coming from a drop in one investments price. Some financial advisors even advocate holding no more than 10% of assets in an employers stock.

The study showed that an average 401(k) plan offered 13 fund choices in 2002, yet the average participant in the study only held 3.6 of these funds. Around 1.5 million investors were studied.

In addition, Hewitt reported that about 40% of employees held only one or two asset classes in their 401(k) which were primarily company stock, guaranteed investment contracts, stable value funds or large-company focused U.S. stock funds.

Hewitt also found declines in participation, transfer activity, equity allocation and contribution rates. The average participation in plans last year was 68.2%, a decline of 2.8 percentage points from 2001. Although contribution rates held steady at 7.8%, those in the 20 to 29 age bracket invested only 6.5% of their pay. Also, equity investments fell from 74% in 2000 to 66% last year. In 2002, 16.8% of participants made a change to their 401(k) plan, down from 20% in 2001.

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The staff of Money Management Executive ("MME") has prepared these capsule summaries based on reports published by the news sources to which they are attributed. Those news sources are not associated with MME, and have not prepared, sponsored, endorsed, or approved these summaries.