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The bulk of mutual funds owned by U.S. investors are held in retirement plans and the number of funds is growing year-by-year, according to a January survey by Millionaire Corner that reflects changing trends in how Americans plan and save for their golden years.
Two-thirds of the mutual funds held by U.S. households are divided between employer-sponsored retirement plans, such as 401(k) and 403(b) funds, and Individual Retirement Accounts held by one or both spouses. The remaining 34 percent are in “non-retirement” accounts. The households also report owning a sizable number of funds with more than 25 percent owning 10 to 25 funds, and nearly 7 percent holding 25 or more. Another 23 percent own five to nine mutual funds – making a total of 56 percent of investors who own five or more mutual funds and 44 percent own four or less.
“Mutual funds allow investors to diversify over a large number of assets, but more than 10 funds can be too much of a good thing,” said Catherine McBreen, president of Millionaire Corner. “It can become difficult to track the performance and holdings of a large number of mutual funds, putting investors at risk of overweighting their portfolios in one product or sector – a phenomenon called mutual fund overlap. Consulting with a financial advisor can help investors avoid overlapping funds.”
The robust number of mutual funds reflects recent attempts by employers to improve their 401(k) retirement plans. Also known as defined-contribution plans, 401(k)s are funded with employee contributions and can feature matching contributions from employers. With the decline of traditional pension plans, 401(k)s have become the primary retirement savings vehicle for American workers. Assets held in 401(k) retirement plans accounted for $10.2 trillion in assets at the end of 2010, an 11 percent increase from the 9.3 trillion a year earlier. IRAs held another $4.8 trillion.
As the 401(k) has taken on the central role in ensuring retirement security, employers have taken steps to expand and improve their fund offerings. Companies have added retirement-oriented target-date funds and more conservative bond funds to their plans, and have increased the average number of mutual funds they offer from 6.3 in 1996 to almost 20 today, according to the 2011 Retirement Market Insights report from Millionaire Corner.
Over the same period, employees have nearly doubled the number of funds in their 401(k) retirement plans. Employees used an average of 5.3 plans in 2011, up from 2.7 funds 15 years ago. Educational efforts aimed at helping employees maximize their retirement plans appears to have encouraged workers to take advantage of the larger number of fund choices, according to Gerald O’Connor, author of the report. Allocating retirement assets over a larger number of mutual funds helps investors diversify their portfolio, a strategy that helps maximize returns while minimizing investment risk.
A prolonged stock market rally has encouraged employees to invest the bulk of their 401(k) assets into stock mutual funds (37 percent), though stable value funds account for (23 percent) of retirement fund assets. A relatively small percentage of assets are allocated to bond (4 percent) and money market (2 percent) funds.