401(k) Evaluation Finds Most Making Savings and Investing Mistakes

According to a Financial Engines news release, 36% of participants in the study hold high concentrations of company stock and 33% failed to contribute enough to receive the full company match. The evaluation found participants with lower salaries, lower plan balances and those closer to retirement tend to make the most costly mistakes, Financial Engines said in the release.

401(k) Investing Mistakes

The evaluation found that in general, the older the participant, the more company stock they are likely to hold. Forty-three percent of those over age 60 hold more than 20% of their 401(k) portfolios in company stock, compared to only 28% of those under age 30.

Financial Engines said extreme company stock concentrations follow a similar trend, with 25% of participants over age 60 holding portfolios with 50% or more invested in company stock, compared to just 13% of those under age 30. Fifteen percent of participants over age 60 hold 80% or more of their portfolios in company stock.

The impact of the company stock holdings, according to the evaluation: portfolios with more than 20% in company stock could expect an average of 18% less projected retirement wealth after 20 years, compared to those holding less than 10% in company stock (given the same starting balance and assuming no future contributions).

In addition, 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 staring balance and assuming no future contributions).

In addition, the evaluation found participants earning the lowest salaries are the most likely to make investing mistakes. More than half (53%) of participants with annual salaries below $25,000 have portfolios with very inappropriate risk and/or diversification, compared to 33% of those earning more than $100,000 per year. The inappropriate risk or diversification includes high money market or stable value concentrations, age-inappropriate portfolios, or concentrations in a single asset class.

According to the evaluation report, portfolios with very inappropriate risk and diversification could expect to have 22% less projected retirement wealth after 20 years, compared to those with appropriate risk and diversification (given the same starting balance and assuming no future contributions).

One-third of active participants fail to save enough to receive the full company match, Financial Engines found. Sixty percent save enough to receive the full employer match but are saving below the IRS or plan limits, and only 7% of all active participants save enough to come within $500 of the IRS or 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 over 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 to 24% of those with salaries between $50,000 and $75,000 and 12% of those with salaries greater than $100,000 per year.

Saving at least enough to receive the full employer match has a significant impact on projected retirement wealth. According to the evaluation report, if the average participant not saving enough to receive the full employer match (saving 1.9% of salary) and a median account balance of $5,872 continued contributing at that same rate and receiving the partial employer match, that participant is projected to have approximately $46,800 after 20 years. However, if the participant increased his or her contribution to 6% of salary (enough to receive the full typical employer match in the report), the participant is projected to have approximately $120,900 after 20 years - a difference of 158%.

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, and rated each portfolio in terms of Risk and Diversification, Company Stock, and Participant Contributions.

Copies of the report can be downloaded at no charge from www.financialengines.com .