EBRI EMPLOYEE Conclusion STATEMENT OF PAUL J. YAKOBOSKI invested heavily in equitiesSTATEMENT with their OF 401(k) PAUL J.account YAKOBOSKI balances. At higher Brief (August 1996) based STATEMENT on an analysis OF PAULof J. data YAKOBOSKI provided by three large 401(k) for plan design and policymaking. For example, in this analysis examining BENEFIT EMPLOYEE EMPLOYEE BENEFIT BENEFIT RESEARCH RESEARCH INSTITUTE INSTITUTE RESEARCH Chart1 income levels, about one-quarter RESEARCH of plan participants ASSOCIATE had over 80 percent of plan sponsors with an average of 60,000 participants per plan. We looked at Our averages research wouldindicates show that greatereducation nonequitycan investments have an impact amongin terms older of leading INSTITI:TE SUMMARY SUMMARY EQUITYINVESTMENTPATTERNS AMONGYOUNG worker investment decisions and how these decisions varied with worker their assets invested in EMPLOYEE equities. BENEFIT Higher RESEARCH income participants INSTITUTE were also much workers to reallocate their 401(k) savings investments. At the same time, we participants, but it would mask the occurrence of both zero and heavy equity PLANPARTICIPANTS BEFORE THE SENATE SPECIAL COMMITTEE ON AGING less A demographics likely clear to understanding have such zero as age, equity of the salary, investments. investment and tenure. decisions Again, The this three that is workers a plans plan used that are has incurrently this an see that, even in plans with relatively sophisticated education and investments A clear understanding among of young the investment participants. decisions that workers are currently making in their making in their 401(k) plans and how these decisions vary with worker 401(k) plans 35 and,'1 how these decisions _ Zero vary Equity with worker demographics is important for policy Statement Before extensive participant education program. demographics analysis have iswell important developed for SEPTEMBER educational policy purposes, 24, programs 1996in designed particular, to for assist evaluating workers communication programs, there exists a real dichotomy in the allocation purposes, in particular, for evaluating the implications of proposals that would to some degree 30 ,,,I 7 [] 80% _-Equity 28.1 the implications of proposals that would to some degree privatize the Social privatize the Social Security System with individually directed accounts. _- • - :1"_'.3 The Senate Special Committee on Aging Other Research Security in making System appropriate with individually decisions regarding directed accounts. their participation in the plans. behavior of workers within similar demographic groups. Variations in _ 25. ,rl 21.7:9.8 /- _ 72 Many analysts have focused on average allocations in past studies of worker investment 20 , _ ....... Mr. Chairman: Hearing on Findings Many decisions We areanalysts from currently will the naturally have other analyzing focused two lead large a on to database variations average plans provided were allocations in retirement similar, by ina especially past plan income studies service results. with of provider regards worker EBRI decisions in 401(k) plans. While informative, data on average allocations mask much of the According to the 1995 EBRI/Greenwald Retirement Confidence Survey, 95 investment decisions in 401(k) plans. While informative, data on average detail regarding the variation in investment preferences among workers with differing o 15 i _._i (L) _:.<_..'::: The Future of the Social Security Program to allocations that younger consists workers; maskof over much in all 1,000 of three plans the plans detail withthere regarding more was that a the 100,000 sizable variation participants. fraction in investment of younger I will I am pleased to appear before you this morning to discuss issues regarding the has percent demographic undertaken of plan characteristics. a participants Social Security Our utilizing research simulation indicates educational that modeling a significant material projectprovided fraction designed of to planto them preferences among workers with differing demographic characteristics. Our participants, particularly younger ones, are heavily diversified into equities, while at the 10 ........ i ':':_':"_':': research discuss the indicates results based that a onsignificant these four fraction data sources of plan today.participants, particularly participants future same time of a with the large Social percentage zero equity Security of their investments program peers holdand (ranging zero specifically equities from in their 17 the percent accounts. asset allocation to The 34 data capture such variations. The EBRI project will provide a two-phase analysis of reported that the material included a description of the investment options by younger ones, are heavily .........diversified ::_iii_t_i " into - ....... equities, while at the same time a indicate that the low earning, younger participants may not appreciate the advantages of _:i.&_:..: percent). large percentage At the same of their time, peers in two hold ofzero the equities three plans in their there accounts. were even I: The larger data decisions diversifying that their workers 401(k) portfolio make to when include theyequities participate when investing in 401(k) for a plans. retirementMythat name is the available present in system the plan, and and the 69 consequences percent reported of alterna thattivethe reforms. material Our coveredproject the is PlanA Plan Paul A J. Yakoboski, PlanB P Ph.D. lanB PlanC PlanC decades in the future. indicate that the low earning, younger participants may not appreciate the Research Associate fractions of workers in the same age groups who invested heavily in equities advantages Many analysts of Age diversifying have 20-29 focused Age30-39 their on average 401(k) Age20-29 portfolio allocations Age30-39to Age ininclude 20--29 past studies Age equities 30'39 , but when while unique is Paul in Yakoboski. that it willI am not a only Research estimateAssociate the reforms' at the effects Employee on the Benefit U.S. principles of asset allocation and diversification. Almost one-half (46 Employee Benefit Research Institute investing for a retirement that is decades in the future. For example, in one large plan 21 percent of participants had none of their account balances Source: EmployeeBenefit Researchinstitute. (more than 80 percent) (see chart 1). These findings highlight real Research informative, Institute data on(EBRI), average a allocations nonprofit, mask nonpartisan, much public of the policy detail regarding research population, invested in any theequity-based U.S. economy, funds (not and including the Social company Security stock). program It is particularly but alsonoteworthy explore percent) of these workers reported that the material led them to reallocate For example, in one large plan 21 percent of participants had none of their that 17 percent of participants in their 20s and 18 percent of those in their 30s had none of their differences in allocation behavior Washington, among workers DC within similar account the organization the implications variation balances based in ofinvested investment in reforms' Washington, in effects preferences any equity-based DC. for employment-based among funds workers(not plans. with including differing As company results account balances invested in the equity options. On the other hand, 21 percent of all their money among the options available in the plan. This effect was slightly stock). It is particularly noteworthy that 17 percent of participants in their participants had over 80 percent of their account balances invested in equity-based funds. 24 September 1996 demographic 20s demographic and 18 percent groups. characteristics. of Situations those in Our their occur analysis 30s within had indicated none a planof where their that aaccount a significant sizablebalances fraction fraction become Twenty-seven available percentin ofearly participants December in, theirwe 20s would and 22 be percent happy of participants to share them in their with 30s had more likely among those with a high school degree or less (50 percent) than invested heavy equity in the investments equity (greater options. than On 80 percent the other of account hand, balances). 21 percent Relatively of all few low the members of this committee. ofof participants plan participants, has no particularly equity allocations younger and ones, simultaneously are heavily another diversified fraction into participants EBRI earning has participants been had over committed, were80 invested percent since heavily its of founding their in equities account in with 1978, their balances 401(k) to the invested account accurate balances. in equity- At among those with more education (45 percent). based higher income funds. levels, Twenty-seven about one-quarter percent of plan of participants participants had in ove their r 8020s percent and of22 theirpercent assets Chart2 has very heavy equity allocations. statistical equities, while analysis at the of same economic time asecurity large percentage issues. Through of their our peers research hold zero we of invested participants in equities.in Higher their income 30s hadparticipants heavy equity were also investments much less likely (greater to have than zero 80 percent equity investments. of account This balances). was a plan Relatively that had an few extensive low participant earning education participants program. were HEAW' NONEQUITYINVESTMENTS strive equities to incontribute their accounts. to the formulation The data indicate of effective that the and low responsible earning, younger health and invested heavily in equities with their 401(k) account balances. At higher According to the 1996 Retirement Confidence Survey, which will be publicly income According levels, to the 1995 aboutEBRI one-quarter /Greenwald of Retirement plan participants Confidence Survey, had over 95 percent 80 percent of plan of 70 Our participants recent analysis may not of the appreciate database theconsisting advantages of over of diversifying 1,000 broad-based their 401(k) plans retirement policies. Consistent with our mission, we do not lobby or advocate their participants assets utilizing invested educational in equities. material Higher providedincome to them participants reported that were the also material much released next week, 24 percent of workers are very confident in their ability 60 less included likelya description to have of zero the investment equity investments. options available This in was the plan, a plan and that 69 percent had an reported again portfolio provides to include similar equities findings. when In investing this database, for a almost retirementone-half that is (49decades percent) in extensive that specific the material policy participant covered recommendations. the education principles program. of asset allocation and diversification. Almost one- to invest wisely for retirement, 47 percent are somewhat confident, and 29 _ IPlanB l J :=- 50 _< i half (46 percent) of these workers reported that the material led them to reallocate their oftheallfuture. plan .o =oparticipants 40 This puts them had none at riskof of their accumula account ting balances insufficientinvested assets intoIequity- fund a According to the 1995 EBRI/Greenwald Retirement Confidence Survey, 95 money among the options available in the plan. This effect was slightly more likely among percent are not confident. Workers with college degrees and those earning O_ // : those with a high school degree or less (50 percent) than among those with more education (45 percent of plan participants utilizing educational material provided to them Worker Investment Decisions based funds (not counting employer stock). Among workers in their 20s, 41 desired retirement lifestyle or being unable to retire when they desire. percent). reported over $50,000 that are the the material most likely included to a be description very confident. of the investment options available in the plan, and 69 percent reported that the material covered the percent had no equity investments. Among workers in their 30s, 45 percent principles A clear understanding of asset allocation of theandinvestment diversification. decisions Almost that workers one-half are (46 currently Our research indicates that education can have an impact in terms of leading workers to percent) reallocate of their these 401(k) workers savings investments. reported that At the the same material time we ledseethem that, even to reallocate in plans with u_ The views expressed in this statement are solely those of the author and should not be had For no example, equity ininvestments. one large plan 21 percent of participants had none of their making in their 401(k) plans and how these decisions vary with worker their relatively money sophisticated among the education options andavailable communication in the programs, plan. This there exists effect a was real dichotomy slightly attributed to the Employee Benefit Research Institute, its officers, trustees, sponsors, or other more in the likely allocation among behavior thoseof workers with a within high school similar demographic degree or less groups. (50 Variations percent) in than Aged20-29 Aged30-39 Aged40"49 Aged A_60 staff. The Employee Benefit Research Institute is a nonprofit, nonpartisan, public policy account decisions will balances naturallyinvested lead to variations in any equity-based in retirement income funds results. (not including company among demographics those with is important more education for policy (45 percent). purposes, in particular, for evaluating andOver research organization. At the same time, there is evidence within the three large plans of workers the stock).implications It is particularly of proposalsnoteworthy that would that to 17 some percent degreeof privatize participants the in Social their Our research indicates that education can have an impact in terms of leading Source: EmployeeBenefit Research[nstitute_ : workers to reallocate their 401(k) savings investments. At the same time we 20s and 18 percent of those in their 30s had none of their account balances matching their investment patterns with their time horizons in a textbook Security system with individually directed accounts. Until recently, data rich see that, even in plans with relatively sophisticated education and aereater than 80 percent of account bafances. : communication programs, there exists a real dichotomy in the allocation manner, e.g., older workers having larger allocations devoted to nonequity enough invested in to the provide equity this options. type of On information the other has hand, been21 sorely percent lacking. of all As part behavior of workers within similar demographic groups. Variations in /'./i [\b,_i,u'I.N\ _. decisions will naturally lead to variations in retirement income results. \\ ;_-ili H._l_ul [)( investments than their younger colleagues. Chart 2 shows that in the three participants had over 80 percent of their account balances invested in equity- of EBRI's ongoing Defined Contribution Project, we have collected plan- !;H)['_i,"[_([ 4 plans based specificanalyzed, funds. data that Twenty-seven theallow percentage such percent analysis. of partidpants of participants We recently with in more published theirthan20s an80and EBRI percent 22Issue percent of [ :ix _:L! ,., !L',!I! their of oarticiDants account balance in their invested 30s had inheavv noneouitv-based eouitv investments ootions (ereater increased than 80