Retirement plan diversification improving, women take the lead

Wells Fargo report says few men or women are contributing recommended 10% to their 401(k)

Apr 1, 2014 @ 12:52 pm

By Carl O'Donnell

Women are less likely to take full advantage of a workplace retirement plan, but when they do, their portfolios are often more diversified, according to data released Tuesday by Wells Fargo & Co.

Only about half of employed men and 43% of employed women are enrolled in a workplace retirement plan, according to the data, which was based on 2,036 companies.

Moreover, most men and women are failing to meet the recommended benchmark for annual retirement savings contributions of 10% of income, including any employer match. Only 43% of men contribute at this annual rate. Among women, the number is 39%, according to the data.

Those employees who did contribute to their 401(k) plans saw their average balances rise 19% in 2013 and 35% over the last two years combined, largely due to stock market gains, according to Wells Fargo.

One reason that women aren't saving as much may be the gender gap in wages, said Joe Ready, director of Wells Fargo Institutional Retirement and Trust. All else equal, a lower income makes saving more challenging.

“The wage gap is a huge issue for women,” said Cathy Weatherford, president and CEO of the Insured Retirement Institute. “Then add in the fact that six in 10 women are the primary or only breadwinner for their family.”

Neither men nor women, however, are saving as much as they should. One reason for this is that automatic enrollment programs often begin by putting 3% of employees' income into retirement plans, and then gradually increase the amount. Many people mistakenly assume that since 3% is the default, this is all they need to save, Mr. Ready said.

“There's also the fact that the middle class has been crunched by the recession,” Mr. Ready said. "Juggling everyday bills and retirement can be a challenge."

Most employees attain a reasonable level of diversification, with women doing slightly better than men: 70% of women, as opposed to 67% of men, meet the minimum standard. Wells Fargo defined a minimum level of diversification as two equity funds and a fixed-income fund, and less than 20% of the portfolio invested in employer stock.

The main reason that women are more diversified than men is that they are more likely to use managed investment options. About three-quarters of women are invested in the accounts as opposed to 71% of men, the data said. Managed investment options are also more popular among new hires than older employees.

"Women tend to be a little more risk averse than men," Ms. Weatherford said. "This could make target date funds more appealing."

Employees' diversification has improved in recent years, thanks to the recent flourishing of target date funds, a managed investment option that automatically adjusts holdings to maintain an optimal level of risk. The percentage of people invested in managed options has jumped nearly 5% in the last two years, the data showed. This helped drive a 4.2% increase in respondents with diversified portfolios during the same period.

“Target date funds have been a positive way to take a lot of fear out of the equation,” Ms. Weatherford said. “Many investors are not on the level they need to be to select a holistic set of funds themselves and then rebalance those funds.”

More employees are using Roth 401(k) plans when their employers offer them, according to Wells Fargo. Over the last two years, usage of Roth 401(k)s jumped to 10.4% of participants from 8.6%. Millennials are the biggest users of the Roth 401(k), which takes after-tax contributions and allows participants to withdraw funds tax-free in retirement.

(An earlier version of this article incorrectly stated the average 401(k) balance increase in 2013. The average balance rose 19% in 2013, not 35%.)

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