At first blush, it looks like 401(k) plan participants have well-diversified retirement savings portfolios. Some 50 million workers have $2.6 trillion in 401(k) assets-with a little over 50% in stock funds, according to the Employee Benefit Research Institute (EBRI) in Washington, D.C. The rest is in bond funds, money market funds and stable value funds.

But if you think 401(k) investors have mastered the art of smart diversification, think again. The seemingly savvy balanced 401(k) portfolio split masks a slow trickle of 401(k) stock investments into fixed-income accounts.

Plus, it's not necessarily smart analysis that has triggered the relatively even split, observers say, but rather, fear and investor paralysis.

A deeper look at the numbers paints the picture. That 50%-plus stock allocation reflects a drop from about 66% before the 2008 financial meltdown.

Over the past 32 months, ended in August, $8.3 billion has moved out of stocks into fixed-income accounts, says Hewitt Associates in Lincolnshire, Ill. In August alone, $347 million-0.31% of 401(k) assets-followed this trend, with transfers almost daily.

Eighty percent of the funds transferred in August moved into bond funds. About 10% of assets, primarily from new employees, went into target date funds-the default investment option offered by many plan sponsors. The rest went into stable value and money funds.

"People are scared to death," says Kelli Send, a senior vice president at the financial planning firm Francis Investment Council in Milwaukee, Wis. Their 401(k) "is their single largest asset aside from their home."

Research published by the Michigan Retirement Research Center in 2009 appears to back up Send. Participants are making asset-allocation mistakes, says the paper, co-authored by Wharton professor Ning Tang and others. This, despite the fact that most plans offer a good selection of investment options for diversification. The mistakes could cause an employee's wealth to be reduced by 20% at retirement, says the paper, "Efficiency of Pension Menus and Individual Portfolio Choice in 401(k) Pensions."

Sixty-eight percent of participants either have not made any savings or investment changes or they have stopped contributions because of the recession, according to a January 2010 survey by Francis Investment Council. The poll spanned more than 1,100 plan participants. Send adds that one of five employees reduced their contributions because of rising health insurance premiums."Economic uncertainty, the desire to pay down debts, job losses or wage reductions within the household is holding them back," Send says.

Many employers also have reduced or eliminated company contributions to their plans. The value of employee-sponsored retirement plan benefits as a percentage of pay has declined by double-digit levels over the ten years ended in 2008, said a July 2010 report by Towers Watson in New York. The hardest hit industries were in the wholesale and retail sectors of the economy.

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