Shlomo Benartzi and Richard Thaler examined diversification through the lens of 401(k) plans. In their study, "Risk Aversion or Myopia? Choices in Repeated Gambles and Retirement Investments," they found that many investors divide their money equally across all the choices in their 401(k) account. For example, if their plan offers four stock funds and one bond fund, their portfolio will be 80 percent stocks and 20 percent bonds. This type of "diversification" is a symptom of the lack of finance and investment education among plan participants.
Status Quo Bias William Samuelson and Richard Zeckhauser studied decisions made by participants in the TIAA-CREF retirement plan in their paper "Status Quo Bias in Decision Making." When faced with a decision, participants tended to either do nothing or simply stick with a previous choice. They found that only 28 percent of participants had ever changed their asset allocation, despite the average length of participation of 12 years in the plan.
Concentration in Employer Stock
An important area of concern, especially in large retirement plans, is overconcentration in an employer's stock. Employees who concentrate a significant amount of their wealth in the stock of their employers are committing two errors:
- They concentrate their portfolios in a single stock.
- They compound the first error by concentrating their portfolio in the stock of their company. This means that if the company struggles, not only will their portfolio likely drop, but their jobs would be at risk at the same time.
These investors are confusing the familiar with the safe, assuming that because they know the company they will know when to get out before things turn for the worse. The collapse of Enron should have taught all investors to not make this mistake, as Enron employees had 62 percent of their 401(k) plan assets invested in company stock.
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