How important are education, age, wealth and even race when it comes to asset allocation choices? It’s a question that many retirement institutions should address when planning the communication strategies, advisory services and educational tools for their pension funds’ members.
New research by the Employee Benefit Research Institute (Ebri), a non-profit-making, bipartisan organisation in the US, can help us to understand this issue.
The research analyses asset allocation in individual retirement accounts (IRAs) and 401(k) plans, two very popular kinds of retirement plan in the US. IRAs represent the largest portion of total pension assets in the country – 23% of $10.5 trillion (E12.2 trillion) at the end of 1999. They are established by workers (part-timers or the self-employed) and other individuals (including those not in the labour force, such as non-working spouses), without any support from employers. Individuals mostly use IRAs to rollover the capital they have accumulated elsewhere in the retirement system.
On the other hand, 401(k) plans are defined-contribution retirement schemes, sponsored by employers. Both IRAs and 401(k)s allow individuals to decide their asset allocations – they can choose whether to invest in stocks or bonds, whether directly or, more often, through mutual funds.
A principal finding of the Ebri research is the dramatic increase from 1992 to 1998 (the last year for which data are available) in the percentage of IRA and 401(k) plan participants who had invested primarily in stocks. Eight years ago this was the case for only 31.9% of IRA participants, while 42.5% were mostly in interest-earning assets, and 24.4% were split between stocks and bonds (1.2% were in ‘other categories’).
In 1998, the proportion of IRA participants who were invested mostly in stocks had risen to 52.1%, an increase of 63%; those invested mostly in bonds had decreased to 27.3%, and the number split between stocks and bonds had fallen to 15.5%.
The change in the figures for 401(k) plans are even more impressive In 1992, 21.1% of participants were mostly invested in stocks, while in 1998 this had more than doubled to 44.9% (a 113% increase in six years). The number of members who were oriented towards interest-earning assets fell from 18% to 16.2% and the number split between stocks and bonds decreased from 41.5% to 38.3%. ‘Guaranteed investments contracts’ almost disappeared from portfolios, having fallen from 19.4% to 0.6%.
Despite these massive shifts, investors’ profiles have hardly changed over the years. Those who are younger, have a higher family income, have reached a higher level of education and are white (non-Hispanic) are most likely to invest in stocks. In 401(k) plans, 46% of those under 35 are stock-oriented investors, compared with 44.2% of 35 to 44-year-olds, 48% of 45 to 54-year-olds, and only 39.1% of those aged 55 to 64.
Some 50% of those with a college degree (or some college education), are stock investors, compared with only 24.1% of those without a high school diploma. The figure is more than 52% among those with a net worth in the top percentile, compared with only 37.4% among those in the bottom one. And 45.8% of white 401(k) participants fall into this category, compared with only 39.9% of non-white members. Similar patterns can be discovered among IRA participants.
Another noteworthy factor is the correlation between participation in a defined-benefit plan and the value of the individual account balance. Participants in 401(k) plans who also participate in a defined-benefit plan are more likely to be mostly invested in stocks (50% versus 43.7%).
The higher their account balance, the greater the probability that they are stock-oriented. The figure is 54.3% among those with an account balance of $50,000 to $100,000 (although this falls to 49.5% among those with $100,000 or more), but only 42.2% for those with a very small account balance (less than $5,000).
The 401(k) plan participants decide their asset allocation with or without their employer’s advice (see story below). IRA participants, in contrast, are direct clients of financial operators, who help them to build their portfolios. So it’s interesting that of the $2,091bn in IRA assets at the end of 1998, $930bn (44.5%) was in mutual funds, $721m (34.5%) was in brokerage self-directed accounts, $190bn (9.1%) in life insurance, $151bn (7.2%) in commercial banks, $62bn (3%) in savings institutions and $36bn (1.7%) in credit unions.
In 1990, the market share for mutual funds was only 22%, while brokerage firms held 27.8% of assets, commercial banks had 20.7% and savings institutions had 16%. Brokers’ share stopped increasing in 1992 and the share for life insurance has stayed more or less constant over the years. Mutual funds, meanwhile, have been getting a larger share every year.

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