Human Resources: Education Level and Marital Status Among Factors Influencing 401(k) Investing

WASHINGTON, March 6, 2008 – While the average U.S. household invests about
55 percent of its 401(k) or other defined contribution plan assets in
common stocks, many Americans are investing all or nothing in equities, due
to a host of factors, including education level and marital status,
according to a new analysis of government data by Watson Wyatt Worldwide, a
leading global consulting firm.

The analysis of data from the Federal Reserve’s Survey of Consumer Finances
found a wide variation in investment behavior. For example, while almost 20
percent of working households allocated nothing to equities in their
retirement accounts, more than 25 percent were “all in,” allocating 100
percent of their defined contribution plan assets to equities. The analysis
is based on 2004 data, the latest year of statistics available for this
survey.

Various factors are correlated with the likelihood of 401(k) plan
participants’ investing in equities (see table at the end of release),
according to the Watson Wyatt analysis. Generally speaking, plan
participants who are younger, better educated, risk-tolerant, in the
private sector and with a pension plan and who engage in long-range
financial planning hold a larger share of equities in their retirement
accounts than do other participants. In addition, investors who are
married, in good health or not a union member are less likely than other
investors to avoid equities altogether.

“Some of the investment behavior, such as older workers’ taking on less
risk, follows what investment advisers have long suggested,” said Mark
Warshawsky, head of retirement research at Watson Wyatt. “But the influence
of other personal factors — such as individuals’ education level or health
status or whether they have a pension plan at work — raises important
issues for policymakers and employers alike.

“Moreover, some variation is not explained and seems to be idiosyncratic.
The key question is: Do we really want so much variation in investment
behavior in retirement accounts, especially at the extremes? These
investing differences can easily translate into either too much or too
little risk taking and tens of thousands of dollars in retirement savings —
even more for some workers.”

Alan Glickstein, a senior retirement consultant with Watson Wyatt, said the
findings raise particularly pressing questions for employers. “With the
shift to employee-directed retirement investments, companies are clearly
less able to predict when and how their workers will be able to retire. To
some extent, the problem can be addressed through better 401(k) plan design
and employee education. New Department of Labor default investment
regulations, which focus on the use of life-cycle funds in 401(k)s, also
will help. But absent the security of a traditional pension or
cash-balance-type plan, workforce planning becomes a much more expensive
proposition.”

Which Factors Influence 401(k) Investing?

Factor Findings
Marital status Married couples tend to invest more in equities, perhaps
because the security of two potential wage earners allows for more risk
taking with investments.
Education level Households headed by someone with no high school degree
allocate 10 percentage points less to equities.
Have traditional pension plan (in addition to 401(k)) The correlation
between likelihood to invest in equities and whether a household is also
covered by a traditional pension (in addition to a 401(k)) is positive. For
every $10,000 in present value of traditional pension, a household
allocates 0.05 percentage points more to equities. Participants in defined
benefit plans have a more secure base of retirement income and therefore
can afford to take more risk with their supplementary savings.
Income The correlation between likelihood of investing in equities and
household income is surprisingly weak — for every $1,000 in household
income, the equity share increases by 0.002 percentage points (for
instance, 0.2 percentage points for $100K). One explanation is that wage
earners at lower income levels will receive a relatively higher share of
their retirement income from Social Security —a guaranteed benefit — and
thus are willing to take on more risk with the 401(k) portion of savings
than usually thought.
Personal planning horizon Households that report planning horizons of at
least a few years allocate 5 percentage points more to equities.
Age There is a negative but not a linear relationship between age and
percentage of assets invested in equities. For example, the average
household headed by a 55-year-old allocates 6.5 percentage points less to
equities than one headed by a 25-year-old, but only 1.5 percentage points
less than a household headed by a 35-year-old, and 8 percentage points more
than one headed by a 70-year-old.
Unionized Households headed by union members are more likely to avoid
equities altogether.
Public vs. private sector Those working in the public sector allocate 4
percentage points less of their retirement accounts to equities. This is
somewhat surprising, given the relative security of public sector jobs. But
people working in the public sector might be inherently more risk-averse.
They also tend to retire earlier, so they have shorter investment
timeframes, which tends to discourage equity investment.
Large company vs. small company Households headed by those who work for
larger companies are less likely to invest 100 percent of plan assets in
equities. This could be because those who seek employment at larger, more
stable companies may be more risk-averse than those who work for smaller
companies. Or it may mean that large companies are doing a better job of
providing investment advice.
Health status Those in poor health are more likely to avoid equities.
That’s likely because the healthy feel more certain about their future
earnings potential and thus take on more risk. Also, they may not need to
keep savings in relatively safe investments because a hardship withdrawal
is less likely for them.
Risk tolerance Compared with households that report lower tolerance for
risk, highest-risk-tolerance households allocate almost 20 percentage
points more to equities.

Read more information about workers’ allocations to their 401(k) plans in
Watson Wyatt’s Insider,
http://www.watsonwyatt.com/us/pubs/insider/showarticle.asp?ArticleID=18489.

About Watson Wyatt Worldwide

Watson Wyatt (NYSE, NASDAQ: WW) is the trusted business partner to the
world’s leading organizations on people and financial issues. The firm’s
global services include: managing the cost and effectiveness of employee
benefit programs; developing attraction, retention and reward strategies;
advising pension plan sponsors and other institutions on optimal investment
strategies; providing strategic and financial advice to insurance and
financial services companies; and delivering related technology,
outsourcing and data services. Watson Wyatt has 7,000 associates in 32
countries and is located on the Web at www.watsonwyatt.com.