SAN ANTONIO – Do-it-yourself 401(k) account holders are losing tens of thousands of dollars, if not more, by making inappropriate investment choices.
That was the hard message Tuesday at a Center for Due Diligence conference presentation by Matthew Rauseo, a BlackRock director who made it clear America's workers all too often build their portfolios in a random, unsophisticated way.
"I just don't know. I really have no idea," Rauseo said on the question of how people make their investment choices. "There's just no clear answer."
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One fact that is clear, he said, is that young and old DC participants alike share something: they're all poorly invested.
Citing Employee Benefits Research Institute statistics, Rauseo said participants in their 20s generally have 25 percent of their assets in bonds and cash – a position that's too conservative – while pre-retirees are making the mistake of taking on too much risk by invested in equities at the same level as their younger counterparts.
According to a 2011 Aon Hewitt and Financial Engines study, the portfolios of the DIY crowd consistently underperformed as compared to professionally managed portfolios.
Over time, the cost of an "inefficient" portfolio selection for a 20-year-old saving 6 percent of their salary can be as high as $95,585, Rauseo said.
Worse yet, failing to take enough risk means losing as much $635,000, according to figures he shared.
Retirement advisors, Rauseo said, can help nudge participants into reality and realign their portfolio risk by starting with an examination of a plan's demographics and determining common misallocations.
Advisors, he said, can make their case to plan sponsors in part by assessing the impact of potential menu changes.
The bottom line? Advisors need to make sure they're placing participants in age-appropriate professionally managed accounts.
A minority of workers polled (9 percent) might resent having to go through the process, Rauseo said. But that leaves everyone else either happy or, at worst, neutral about having to make changes in their allocations.
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