Cecily O'Connor
RedwoodAge.com

When it comes to 401(k) investing, boomers nearing retirement tend to make the most costly mistakes. 

The most egregious error is allocating too much money toward their own company's stock, a risky move given that if an employers' stock nosedives, older boomers have less time to recover financially, according to Financial Engines, which recently studied nearly 1 million 401(k) accounts. 

High company stock concentrations often contribute to other 401(k) portfolio problems, too, including improper diversification and failure to contribute enough to receive the full company match. It also puts the workers in a bad position if the company's fortunes head downhill, which has happened recently to employees of airlines or other hard-hit industries.

"Throughout this report, the data show that those who need the 401(k) the most are benefiting from it the least," said Jeff Maggioncalda, president and chief executive officer of Financial Engines. 

Most boomers have insufficient savings and are worried about financing retirement. This is particularly true for women, who face a heightened risk of poverty in retirement.

A Real Drag
Financial Engines' research found that the older the participant, the more company stock they are likely to hold. Fifteen percent of participants over 60 hold 80 percent or more of their 401(k) portfolios in company stock; 25 percent have 50 percent or more invested in company stock; and 43 percent hold more than 20 percent. In comparison, 13 percent of investors under age 30 have half or more invested in company stock and 28 percent hold more than 20 percent. 

The trends are concerning for older workers given that a high company stock concentration can hinder a portfolio's growth, according to the report.

For example, those with more than 20 percent in company stock could expect an average of 18 percent less "projected retirement wealth" after 20 years, compared to those holding less than 10 percent, the study found. Those scenarios assume the same starting balance and no future contributions.  In addition, portfolios holding 80 percent or more company stock can expect 42 percent less projected retirement wealth after 20 years.

"Unfortunately, the older employees holding the highest amounts of company stock have the least amount of time to recover if their company's stock happens to take a hit," Maggioncalda said. "Many participants don't realize that holding large amounts of company stock is actually a drag on the long-term growth of their portfolios."

Other factors that can bring a portfolio down include inappropriate risk and diversification - mistakes tend to affect low-income workers the most. More than half of participants with annual salaries under $25,000 have portfolios with very inappropriate risk and/or diversification, compared to 33 percent of those earning more than $100,000 per year.

They often get caught in this situation because of high money market or stable value concentrations, heavy concentrations in a single asset class or age-inappropriate portfolios that are too conservative for younger employees or too aggressive for older employees.

Costly Mistakes
These mistakes cost real money in retirement. Portfolios with very inappropriate risk and diversification will be 22 percent less after 20 years than those with appropriate risk and diversification, according to the report. 

Low contribution rates also affect retirement wealth as 33 percent of all participants fail to save enough to receive the full company match. Younger participants and those with lower salaries or lower account balances lack the most inertia. Nearly half of investors under 30 are failing to save enough to receive the full employer match, compared with 35 percent of those in their 30s, 31 percent in their 40s, 26 percent in their 50s and 28 percent over 60.

Consider the following: If the average participant who's saving 1.9 percent of salary (an amount that's not sufficient for the match in the report) with a median account balance of $5,872 continued contributing at that same rate and receiving the partial employer match, they'd have approximately $46,800 after 20 years. However, if they upped their contribution to 6 percent of salary - an amount that's enough to receive the full typical employer match - they would have approximately $120,900 after 20 years.