DC Participants Invest in the Extreme

Although the average U.S. household invests about 55% of its 401(k) or other defined contribution plan assets in stocks, many Americans are going to extremes when it comes to the equity markets.

A new study by Watson Wyatt said many Americans are putting either all or none of their assets in stocks.

The company’s analysis of data from the Federal Reserve’s Survey of Consumer Finances found a wide variation in investment behavior. For example, while almost 20% of working households allocated nothing to equities in their retirement accounts, more than 25% allocated 100%. The analysis is based on 2004 data, the latest year of statistics available for this survey.

In general, plan participants who are younger, better educated, risk-tolerant, in the private sector and with a pension plan, and who engage in long-range financial planning hold a larger share of equities in their retirement accounts than do other participants, Watson Wyatt found.

In addition, investors who are married, in good health, or not a union member are less likely than other investors to avoid equities altogether.

“Some of the investment behavior, such as older workers’ taking on less risk, follows what investment advisers have long suggested,” said Mark Warshawsky, head of retirement research at Watson Wyatt, in a news release. “But the influence of other personal factors – such as individuals’ education level or health status or whether they have a pension plan at work – raises important issues for policymakers and employers alike.”