Worker Investment Decisions: An Analysis of Large 401(k) Plan Data

Abstract

This Issue Brief examines the asset allocation decisions of 401(k) plan participants working for three large employers (AT&T, IBM Corporation, and New York Life Insurance Company) with a total of 180,000 employees. It is a companion to the June 1996 EBRI Issue Brief, "Contribution Rates and Plan Features: An Analysis of Large 401(k) Plan Data."

A fundamental question asked in business and public policy circles is whether workers will accumulate adequate assets in their 401(k) plans for retirement. In addition, the dialogue over the future of Social Security has now begun to incorporate discussion of individual accounts and investment choice. At the same time, many state and local governments are considering the adoption of 401(k)-type plans. Some employers in both the public and private sectors are considering the replacement of defined benefit plans with defined contribution plans. This report is intended to assist these evaluation efforts.

A real dichotomy exists in the allocation behavior of workers within similar demographic groups. A significant fraction of participants, particularly younger ones, are heavily diversified into equities, while at the same time a large percentage of their peers hold zero equities in their accounts. The data indicate that it may be the low earning younger participants who do not appreciate the advantages of diversifying their 401(k) portfolios to include equities. This puts them at risk of accumulating insufficient assets to fund the retirement lifestyle they desire or of being unable to retire when they desire.

At the same time, there is evidence within these plans of workers matching their investment patterns with their time horizons in a textbook manner, e.g., older workers having larger allocations devoted to nonequity investments than their younger colleagues.

While data on average allocations are informative, they mask much of the detail regarding the variation in investment preferences among workers — information crucial for plan design and policymaking. The findings in this report make clear the need to focus on the distribution of allocations when discussing asset allocation.