Less Money Invites Extreme Allocating

Young workers with small balances and owners of Roth individual retirement accounts (IRAs) are likelier than other IRA owners to make “extreme” allocations to either stocks or money, a report found.

The nonpartisan Employee Benefit Research Institute (EBRI) in a report defined “extreme” allocations as having less than 10% or more than 90% in a particular asset category in an account.

By age, the youngest IRA owners, those below the age of 25, had the highest percentage (37.5%), with more than 90% in equities. Above age 25, the percentage of investors holding more than 90% in money/cash equivalent funds decreased. However, the percentage of IRA owners above age 25 with more than 90% invested in bonds and money combined went down as the owner’s age increased, until age 75.

By type, Roth and traditional IRAs established by contributions were more likely to have greater than 90% invested in equities and least likely to have more than 90% invested in money/cash equivalent funds. In contrast, traditional IRAs established by rollovers, and SEP/SIMPLE IRAs were much likelier to have 10% or less invested in equities and 90% or more invested in money/cash equivalent funds

By account balance, those IRA owners with higher account balances generally were less likely to have extreme asset allocations. For example, while 37% of those with account balances of $10,000 to $24,999 had 90% or more of their assets invested in equities, only about one in 10 of those with account balances of $250,000 or more had such a high allocation to equities.

Gender showed little difference. About 29% of females and 28% of males had 90% or more of their IRA assets invested in equities. Similarly, 62% of females and about 65% of males had less than 10% invested in bonds.

The EBRI IRA Database is an ongoing project that collects data from IRA plan administrators. For 2011, it contained complete asset allocation on 18.4 million accounts with $1.388 trillion in assets.

These findings, from the October EBRI Notes, are available online, along with the latest update of the EBRI IRA Database, “IRA Asset Allocation, 2011.”