US worker 401K plan asset mix data was recently publicized in a BusinessWeek article. It compared the makeup of plans from 1997 to 2008, as compiled by Hewitt Associates. I found it to be somewhat encouraging, but still a cause for concern. It also reminded me that I have some allocation work to do as well, given my options.

First, a review of the data...below are some bullet points on key shifts over the past decade, as evidenced from the chart below:

• Company Stock holdings decreased from 31% to 16% (~50% drop)

  International holdings increased from 4% to 9% (~ 2X)

  Lifestyle/Target Date funds increased from 4% to 9% (~ 2X)
  

  
  

Encouraging Trends, but Room for Improvement:

It's good to see employees diversifying out of their company stock. If Enron taught us nothing else, it was that it is completely within the realm of possibility to have your entire retirement nest-egg evaporate within months because you had a disproportionate amount of your holdings tied up in company stock.

While 31% Company Stock in the late 90's was extremely high by any standard, I still feel 16% is way too high. Here's why:

• Many employees feel they "know the company" better than external investors and they know the stock is going to rise. It's natural to have some sort of camaraderie or pride in your company. Sheer statistics tell us that your company's stock is no more likely to exceed major market returns than any other company.

Would you risk 16% of your portfolio in a randomly selected stock?

• Many employees are compensated with stock options as part of their overall compensation. In the event the stock moves meaningfully higher, the leveraged nature of the stock option awards increase substantially over time, much more so than individual shares.

Why would you risk double-jeopardy in significant stock options holdings AND stock holdings?

Other Trends

• International Stock - A 2x increase in holdings was an encouraging sign. On one hand, it would concern me to see investors chasing historical returns of any asset class (international funds have fared much better than US equities of late), but moving forward, assuming 8% or 9% per year returns for US averages forever may not be prudent in the Post-American World (reading this book now, awesome). It really just comes down to diversification. While international equities are a bit more volatile, they aren't correlated perfectly with US indices (while not as decoupled as some would have you believe), it's encouraging to see a shift into another asset base outside the US. Much of the growth of the BRIC economies as well as the frontier economies will be by way of companies that comprise these international funds, and not necessarily via US multinationals.
• Lifestyle/Target Funds - These are decent options for people who leave their retirement funds on autodrive, which is actually a decent way to invest over a multi-decade time horizon. The primary drawbacks I see are that

1. Many investors don't actually know what they're investing in
2. Investors sometimes overload on bonds/cash by holding those assets outside the Target date funds in addition to the Target date funds
3. Many investors thing they're safer than they are (many of these funds are down 7-8% for the year given the proportion of stock holdings)
4. Importantly, the fees are often quite high in these funds for something you might be able to do yourself with existing options in your plan. Over 30 years, if you're paying an extra 50-100 basis points for a self-shifting asset mix that you could do yourself annually, you'll be shelling out 5 figures or more over the life of your investment horizon. Investors often underestimate the impact of fees.

The only caveat I'd add to my analysis is that it may make sense to hold a decent amount in company stock IF your company allows you to buy stock at a discount. Rarely, employees will have the ability to buy stock in a company plan at a 5 or 10% discount. Given the expected return of say, 8%, if you can get an automatic 5-10% return right off the bat, your company doesn't have to perform very well to exceed the market averages and perhaps you want to take advantage of this with a higher allocation.

Upon review of my 401K mix, I only have about 5% of my holdings in company stock, but I'm probably going to head my own advice and divest it completely since I have stock options to boot. Why do I need underlying stock if I have rolling annual stock option grants that can increase in value to a greater degree (if health care stocks make a comeback eventually!).