Your 401(k)

Did you see that remarkable little piece in The Wall Street Journal reporting how employees deploy their retirement assets? Typically, employees in a 401(k) plan get four or five choices: their company’s own stock; common stocks in general; some sort of guaranteed-income account; and maybe one or two others. Right?

Based on a survey of 246 of the largest employers in the country, employees put fully 42% of their retirement money into their own company stock.

Loyalty is great, but talk about putting all your eggs in one basket! Now, if the company begins to do badly, not only might you lose your job — you could see your retirement nest egg devastated as well!

SOURCE: IOMA via The Wall Street Journal

Think of it this way. If you were advising someone else, would you suggest they invest most of their retirement money in your company’s stock? I don’t think you’d advise that. So why would you advise it for yourself?

People who choose their own company’s stock are insufficiently diversified and, chances are, chose it irrationally. They didn’t choose it because they decided it would outperform the mutual fund (although it might). No, chances are they bought it out of loyalty, and/or fear the company will think less of them if they didn’t. (No good company should operate that way. If you need an excuse, tell your boss I made you choose the mutual fund.)

And it gets worse. That’s how 42% of retirement assets were deployed — in the participants’ own companies’ stock.

According to the IOMA study reported in The Wall Street Journal, of the remaining 58%, most didn’t go into broad stock-market mutual funds, where it belongs. Rather, the second highest category was GICs — “guaranteed investment contracts” provided by insurance companies.

GICs seem safe (although they are certainly not as safe as, say, Treasury bonds — they’re backed by insurance companies, not Uncle Sam). And GICs actually might be a good choice at a time like this when the market may be peaking (although the market’s seemed a little toppy for years now and just keeps going up). But this heavy reliance on GICs is nothing new — employees have been making the mistake of choosing them ever since they were invented. The stock market has kazoopled since 1982, yet people liked the “certainty” of knowing their investment fund would be 8% higher next year than this and so missed out on much of the gain.

Over the long run there’s little chance that a GIC will do as well as a broad basket of stocks.

That said — especially if you’re nearing retirement and might need to start withdrawing funds soon — I wouldn’t rush to switch everything out of GICs just now, either. I know, we baby boomers are going to be putting everything into stocks forever, so they can only keep going straight up (until the baby boomers stop adding to the pile and start withdrawing from it, years from now — yipes!). But by that logic, no price would ever be too high to pay for stocks, and that reasoning scares me.

Anyway, the table above shows 42% in your own company’s stock — dumb. Another 24% in GICs — dumb (though even a stopped clock is right twice a day, and this might be one of those times). Yet another 7% is in bonds and cash — dumb (much like GICs, but cash yields even less). A smidgen in “other,” whatever that may be. And only 18% in equity mutual funds (with another 6% in “balanced” funds), which is in fact where most of it should have been.

How are your retirement funds deployed?