Monday, December 8, 2008

More Retirement Plan Choices May Lead to More Risk

Workers who don't know much about investing make inconsistent choices in their retirement plans, according to a University of Pittsburgh professor. Jeff Inman says in a recent experiment, less knowledgeable investors shifted their allocations in stocks, bonds and money market funds when they were offered more options.

Investors were asked to create a theoretical portfolio for a 401(k) retirement plan. Under one scenario, investors were offered three investment options: a stock fund, a bond fund and a money market fund. Under a second scenario, they were offered a total of 21 investments. Investors were also asked to rate themselves "high-knowledge" or "low-knowledge." Inman says high-knowledge investors split their savings roughly the same in both scenarios. Low-knowledge investors roughly matched their high-knowledge counterparts in the second scenario: both put about 60% of their savings in stocks. But when offered fewer choices, the low-knowledge investors put much more of their money into bonds.

Inman says regardless of what you think the ideal investment portfolio should look like, asset allocation is a basic skill. So he says it's a concern that low-knowledge investors would change their allocations so dramatically just based on the number of choices they had. Inman says employers may want to consider helping workers make well-informed choices, perhaps by providing a financial adviser. Inman says it's more important than ever for workers to know how these kinds of investments work, since employers are moving away from traditional pension plans and toward 401(k)-type plans that give employees more responsibility in saving for retirement.

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