CBO Director Peter Orszag reports on very poor decision-making about Americans’ retirement portfolios:
Despite those risks (again, for which workers don’t receive higher expected returns on their investments, on average), a significant number of 401(k) participants hold the bulk of their assets in company stock. According to calculations by the Employee Benefits Research Institute, 47 percent of 401(k) participants were enrolled in plans that offered company stock as an option as of the end of 2006. Of those participants, 7.3 percent held more than 90 percent of their assets in company stock, and over 15 percent held over half their assets in company stock. (See page 33 of EBRI Issue Brief 308, “401(k) Asset Allocation, Account Balances, and Loan Activity in 2006.”) At yesterday’s hearing, I didn’t make clear that the 7.3 percent figure applied only to those who were in plans offering company stock. So the overall share of 401(k) participants with 90 percent or more of their assets invested in company stock is more like .47*7.3=3.4 percent. It’s still too high.
And to be clear, 3.4 percent is too high because the correct proportion of 401(k) participants with 90 percent or more of their assets invested in company stock is zero. Nobody with any choice in the matter should be nearly that heavily invested in any one company. And under normal circumstances, it’s especially pernicious to be heavily invested in the company you work for. That means that if your stock goes bust, it’s probably a situation where you’re likely to lose your job as well.
The only places I’ve ever worked for have been either privately held firms (The Atlantic) or non-profits (TAP, CAP) so I haven’t personally experienced this problem, but I’m told that at a lot of firms there’s substantial informal and semi-formal social pressure to be heavily invested in the employing firm. Maybe not so many people go as far as 90 percent, but 90 percent is absurdly too high anyway. You’d do a lot of good for a lot of people if you found a way to break that habit.