Vanguard: Nest Eggs Lack Attention and Diversity

"Investors too often let their retirement nest eggs lie without proper attention, and don’t do enough to diversify their savings, according to a study to be published by mutual-fund giant Vanguard Group."

Thats an all too true statement from mutual fund giant Vanguard. They looked at >five million people with employer-sponsored defined-contribution plans or individual retirement accounts it administers. Vanguard found that during the first half 2005, only 10% of investors in the defined-contribution plans and 8% of IRA owners made any trades within the accounts.

Thats not to suggest that people should be overtrading — but one would have thought there would have been more assel reallocation or rebalancing going on.   

Vanguard also found that IRA holders are about twice as likely to invest in a single asset class or single fund as are those with defined-contribution plans. The typical IRA holder chooses just one fund, compared with the three funds typically held in a defined-contribution plan, such as a 401(k) retirement savings account.

The average Vanguard-administered defined-contribution plan offered 18 funds at the end of 2004, compared with more than 70 Vanguard funds offered to IRA investors, according to the study. The plethora of choices offered to IRA investors may result in "choice overload," Vanguard said.

Why reallocate? Consider:

Stocks accounted for about 70% of combined assets in IRAs and defined-contribution plans held by the average investor in his late 40s, Vanguard said. But half of the IRA holders put their entire accounts into stocks, compared with 20% of the defined-contribution holders. At the other end of the spectrum, 14% of the defined-contribution investors put all of their money into fixed-income investments, compared with 8% of Vanguard IRA investors.

"It is interesting to us that so many people do appear to take extreme positions, so 100% equity or no equity," said Ms. Young.

Vanguard also advises investors in the plans against trying to time their moves in and out of investments and trading frequently. "Investors should be duly skeptical of their own rationales for market-timing, and instead they should consider making trading decisions based on changes in their overall circumstances rather than their short-term outlook for the financial markets," the study said.


Nest Eggs Seem to Lack Attention and Diversity

Vanguard Finds Investors  Fail to Adequately Nurture Their Retirement Savings

DOW JONES NEWSWIRES, November 28, 2005; Page C9

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  1. Jason commented on Dec 4

    Two thoughts – first, I wonder whether Vanguard took into account that IRAs tend to feature smaller annual contributions, which makes it hard to amass enough capital to diversify across multiple funds.

    But the asset allocation is certainly troubling. It looks like the mirror image of what happened in the mid-1990s, when individuals were being told to diversify into equities (an argument that leaned heavily on Jeremy Siegel) and out of stable value/money market funds. Looks like that argument worked perhaps too well.

  2. Jon H commented on Dec 5

    Perhaps they diversify in their 401k, which has higher contribution limits and matching.

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