Once burned, twice shy. That essentially describes the average retirement investor’s behavior in the wake of the past decade’s two bear markets, according to a new report by the Investment Company Institute (ICI) and the Employee Benefit Research Institute (EBRI). The report shows shifting allocations within 401(k) portfolios.

The study, which looked at allocations of more than 23 million 401(k) accounts, showed that the share of participants with more than 80 percent of their balances invested in stocks dropped from 54 percent in 2000 to 40 percent in 2010. Older investors in particular reduced their stock holdings — with those in their 60s reducing their equity allocations from about 40 percent in 2000 to 21 percent in 2010.

Yet the report also showed that younger investors have not shied away from stocks. On the contrary, the percentage of 401(k) participants in their 20s with 80 percent or greater allocation to stocks rose from 55 percent in 2000 to 60 percent in 2010. The report attributes this to the greater use of target-date funds.

“Growing use of target-date funds appears to be helping to keep younger 401(k) participants invested in balanced portfolios, with equity exposure to help their assets grow over the long term,” said Sarah Holden, ICI senior director of retirement and investor research. “While our surveys and others have shown that investors are less willing to take on stock market risk, 401(k) plan features are countering that trend for plan participants. That’s particularly valuable to provide younger participants diversified portfolios that include growth-oriented investments.”

For a copy of the full report, go to www.ebri.org or www.ici.org.

Portions of this article were prepared by the Financial Planning Association (FPA) using © 2012 McGraw-Hill Financial Communications data/information and provided by Perspective Financial Services, a local member.
Retirement Investing After the Bear