Many older 401(k) plan participants have entered the bear market with most of their plan assets invested in stock.

That point emerged today during a House Education and Labor Committee hearing on the effects of the steep drop in the stock market on employees who participate in defined benefit pension plans and defined contribution retirement plans.

“It’s clear that their retirement security may be one of the greatest casualties of this financial crisis,” Rep. George Miller, D-Calif, chairman of the committee, said today at the hearing. “The current financial and housing crises are stripping wealth from American families at a record rate.”

“Particularly for those workers whose savings were held in too risky a portfolio for their savings goals, or for those who were not well-diversified, these are difficult times,” said Rep. Howard McKeon, R-Calif., the highest ranking Republican on the committee.

Jack VanDerhei, research director at the Employee Benefits Research Institute, Washington, noted that conventional wisdom holds that older workers should shift toward bonds, cash and other conservative asset classes as they near retirement age.

But, in 2006, 27% of the oldest 401(k) participants – participants who were ages 56 to 65 – had 90% or more of their 401(k) assets in stock or stock funds, and another 21% had 80% to 90% of their 401(k) holdings in stock or stock funds, VanDerhei said.

Target-date funds, which are supposed to adjust portfolios as investors with similar expected dates of retirement age, “are likely to become much more common,” especially as the Pension Protection Act, which allows for automatic enrollment of employees in a 401(k) plan, is fully implemented, VanDerhei said.

Target-date fund portfolio diversification “can help avoid excessive exposure to financial market risks,” said Peter Orszag, director of the Congressional Budget Office. “By design, however, workers in defined contribution plans must inevitably bear the risks associated with broad market fluctuations.”

The difficulties created by the market meltdown also affect those guiding employee retirement plans, said Jerry Bramlett, president BenefitStreet Inc., San Ramon, Calif.

“Given how this turmoil is impacting large insurance companies and banks, plan fiduciaries need to make sure that, when offering a so-called stable value or fixed interest fund, such funds are diversified across a large number of financial institutions,” Bramlett told the committee. “What we have learned over the last couple of weeks is that very large institutions can fail no matter how stable they may appear on the surface.”

Bramlett reported that some retirement funds, including some real estate investment funds, have announced that they are frozen and not available for distributions to participants due to a lack of liquidity from their underlying assets.

“This means that current participants cannot change their investment and retirees cannot get distributions,” Bramlett said. “Congress should examine whether investments subject to this susceptibility are appropriate.”