With the recent roller coaster ride of the stock market, many employees have taken a closer look at their asset allocation within their retirement plans, and to the surprise of many, they find their investment strategy is way off base.
I received a call just a few weeks ago from Wendy, an employee in her early 60s who plans to retire next spring. She was nervous about the recent market downturn and wanted to chat about her investments to make sure she was on the right track.
She began to read off her statement – she had 52 percent U.S. equities, 1 percent international equities, and 47 percent company stock. As I was recovering from my shock, she told me she hadn’t made any changes to her account for quite awhile, and figured it was time to make some.
Over-weighted in company stock
Well, Wendy couldn’t have picked a worse time – being less than one year from retiring and in the midst of a market correction. I asked her to describe her comfort level of investing, and she described what she thought was a moderate approach. I was hoping she had some fixed income funds, perhaps in an IRA or previous 401(k), but no such luck.
Wendy is not alone in being over-weighted in equity holdings and company stock so close to retirement. According to an EBRI Issue Brief on 401(k) Asset Allocation that included 20.7 million plan participants in the study, 2 in 10 employees in their 60s had 80 percent or MORE allocated to equities in their 401(k). And like Wendy, about 17 percent of employees her same age had over 40 percent of their holdings in company stock.
As an HR rep, aren’t you curious to see how your employees are diversifying their portfolios? Although you cannot tell your employees how they should be investing, you can at least bring it to their attention if their diversification has you scratching your head.
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Give employees the tools to get back on track
The reality is that many employees never even open their statements, so a separate postcard mailing that is humorous and eye-catching is a better way of drawing their attention. Your plan provider should be able to easily provide the information needed, and you can focus on just those employees who are either extremely under or over-weighted in equities.
Employees who need help in diversifying their portfolio should be given the tools to get on track, such as the option to move to a Target Fund/Pre-mixed Asset Allocation Fund, directed to an online advice tool such as Financial Engines®, or provided an in-person or telephone consultation with a financial professional.
So what did Wendy end up doing to re-allocate her portfolio? Luckily, her company stock had held up well during the recent sell-off, so she moved half of her company stock holdings over to a fixed income fund. She is also now focusing her future deferrals into a moderate pre-mixed fund that better suits her risk tolerance, and that will be automatically rebalanced for her.
This was originally published on the Financial Finesse blog for Workplace Financial Planning and Education.