Cecily O'Connor
RedwoodAge.com

Education level and marital status play a huge role in how well boomers are prepared for retirement, according to a new survey.

These factors, and the subsequent variation they create in retirement accounts, raise pressing problems for employers, policymakers and those nearing retirement. 

For example, over time, investments in stocks tend to provide much greater returns than keeping cash in savings accounts, but they also carry more risk. Still, those who've invested in stocks during the bull market of the past two decades are in a better position as they get set to retire. Those who held onto cash are more likely to need help in their later years.

The average US household has about 55 percent of its 401(k) plan assets in common stocks, according to a Watson Wyatt study, based on analysis of data from a 2004 Federal Reserve's Survey of Consumer Finances. Another 20 percent have allocated nothing to stocks in their retirement accounts, while a quarter have devoted their entire defined contribution plan assets to stocks, also called equities. 

Retirement investors have had a tough go recently, experiencing not only wild stock market swings, but also ongoing worries about jobs, housing and rising cost of necessities like food and gas. Wall Street's decline has some boomers worried that they'll be unable to make ends meet as they age.

As such, 401(k) retirement plans, in which employees are responsible for their own retirement savings, have been called into question on a number of fronts. The manner in which investors allocate the assets is among the biggest concerns. 

Generally speaking, investors who are married, in good health or not a union member are less likely than other investors to avoid equities altogether, according to Watson Wyatt. For example, married couples tend to invest more in equities, perhaps because the security of two potential wage earners allows for more risk with investments.

In addition, plan participants who are younger, better educated, risk-tolerant, in the private sector with a pension plan and engage in long-range financial planning hold a larger share of equities in their retirement accounts than do other participants. Consider that the average household headed by a 55-year-old baby boomer allocates 6.5 percentage points less to equities than one maintained by a 25-year-old, but only 1.5 percentage points less than a household headed by a 35-year-old, and 8 percentage points more than one by a 70-year-old.

"The key question is: Do we really want so much variation in investment behavior in retirement accounts, especially at the extremes?" said Mark Warshawsky, head of retirement research at Watson Wyatt. "These investing differences can easily translate into either too much or too little risk-taking and tens of thousands of dollars in retirement savings - even more for some workers."

An 'Expensive Proposition'
Alan Glickstein, a senior retirement consultant with Watson Wyatt, said the findings are particularly important for employers, given the rapid transition to employee-directed retirement investments through 401(k)s and other defined contribution plans.

"With the shift to employee-directed retirement investments, companies are clearly less able to predict when and how their workers will be able to retire," Glickstein said. "To some extent, the problem can be addressed through better 401(k) plan design and employee education."

Glickstein said new Department of Labor default investment regulations, which focus on the use of life-cycle funds in 401(k)s, will help, "but absent the security of a traditional pension or cash-balance-type plan, workforce planning becomes a much more expensive proposition."

Pension Impact
Households covered by a traditional pension plan, in addition to a 401(k), are more likely to take on risk.

For every $10,000 in present value of  traditional pension, a household allocates .05 percentage points more to equities. That's because "participants in defined benefit plans have a more secure base of retirement income and therefore can afford to take more risk with their supplementary savings," according to the study.

Here are some other factors influencing equity investing:

• Income: The correlation between likelihood of investing in equities and household income is weak. For every $1,000 in household income, the equity share increases by .002 percentage points (for instance, 0.2 percentage points for $100,000). One explanation is that workers at lower income levels will receive a relatively higher share of their retirement income from Social Security - a guaranteed benefit - and may be willing to take on more risk with the 401(k) portion of savings.
• Personal planning: Households that report planning horizons of at least a few years allocate 5 percentage points more to equities.
• Unions: Households headed by union members are more likely to avoid equities altogether.
• Public vs. private sector: Those working in the public sector allocate 4 percentage points less of their retirement accounts to equities. This is "somewhat surprising, given the relative security of public sector jobs," according to Watson Wyatt. But people working in the public sector might be inherently more risk-averse. They also tend to retire earlier, so they have shorter investment timeframes, discouraging equity investment.
• Large vs. small: Households headed by those who work for larger companies are less likely to invest 100 percent of plan assets in equities. This could be because those who seek employment at larger, more stable companies may be more risk-averse than those who work for smaller companies. Or it may mean that large companies are doing a better job of providing investment advice.
• Health status: Those in poor health are more likely to avoid equities. That's likely because the healthy feel more certain about their future earnings potential and thus take on more risk. Also, they may not need to keep savings in relatively safe investments because a hardship withdrawal is less likely for them.
• Risk tolerance: Compared with households that report lower tolerance for risk, highest-risk-tolerance households allocate almost 20 percentage points more to equities.