Not Matching Up

The Financial Engines National 401(k) Evaluation report found that 69% of participants have 401(k) portfolios with inappropriate risk and/or diversification. The report assessed nearly one million 401(k) participant portfolios to determine how well Americans are handling their 401(k) plans, and discovered that 33% of participants fail to contribute enough to receive the full company match. The report also says participants with lower salaries and lower plan balances, as well as participants closer to retirement, tend to make the most costly mistakes.

Sixty percent of participants save enough to receive the full employer match but are saving below the Internal Revenue Service (IRS) or plan limits, and only 7% of all active participants save enough to come within $500 of the IRS plan maximum allowed. Younger participants and those with lower salaries or lower account balances tend to save the least. Nearly half (48%) of those under age 30 are failing to save enough to receive the full employer match, compared with 35% of those in their 30s, 31% of those in their 40s, 26% of those in their 50s, and 28% of those older than age 60. Almost two-thirds (63%) of those earning less than $25,000 per year fail to save enough to receive the full employer match, compared with 24% of those with salaries between $50,000 and $75,000, and 12% of those with salaries greater than $100,000 per year.

Over Stock

Holding too much company stock in a portfolio can be damaging to retirement wealth, the report suggests. Portfolios with more than 20% in company stock can expect an average of 18% less projected retirement wealth after 20 years, compared with those holding less than 10% in company stock. Portfolios holding 80% or more company stock can expect an average of 42% less projected retirement wealth after 20 years than those holding less than 20% in company stock (given the same starting balance and assuming no future contributions).

The report found that, in general, the older the participant, the more company stock he is likely to hold. Forty-three percent of those older than 60 hold more than 20% of their 401(k) portfolios in company stock, compared with only 28% of those younger than 30. Extreme company stock concentrations follow a similar trend, with 25% of participants older than 60 holding portfolios with 50% or more invested in company stock, compared with just 13% of those younger than 30.

The Financial Engines National 401(k) Evaluation looked at 964,118 401(k) portfolios from 82 mostly large plan sponsors across five 401(k) providers.