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Taking a Fresh Look at Your 401(k)
Allocations
A May survey by Hewitt Associates noted that despite record
losses in their 401(k) savings in 2008, individuals stuck with
their 401(k) plans. However, more people dealt with their worry
about investment conditions by shifting money into more
conservative investments. In addition, a significant number of
companies either eliminated or cut back significantly on
matching employee 401(k) contributions.
Hewitt's annual Universe Benchmarks study, which examines the
saving and investment behaviors of more than 2.7 million
employees eligible for 401(k) plans, showed that the average
401(k) balance dropped from $79,600 in 2007 to $57,200 at the
end of 2008. 44 percent of employees lost 30 percent or more of
their savings. Only 11 percent of employees were able to break
even or see a gain in their 401(k) portfolios. Even still, 74
percent of employees participated in their 401(k) plans in 2008,
about the same as in 2007.
However, the Hewitt survey stated that some workers are
reacting to the market downfall by moving 401(k) assets into
less risky investment funds to try and blunt their losses. In
2008, 19.6 percent of investors made trades in their 401(k)
plans versus 18.7 percent in 2007. And the volume of money they
transferred in 2008 was much higher. Nine of the 10 most active
trading days were the day after a large downturn in the market,
or days with an average return of negative 4 percent. Employees'
average equity exposure dropped to just 59 percent in 2008-which
is an all-time low since Hewitt began tracking it in 1997.
Stable-value funds, which are considered less risky investments,
experienced an 11 percent increase in asset allocation in 2008.
That's why it might be wise for investors to get a fresh
start with 401(k) advice as the economy improves. For existing
investors or those who have never begun to save or invest for
retirement, it might be time to consult both financial and tax
experts such as a CERTIFIED FINANCIAL PLANNER™ professional to
make sure both personal and work-related retirement savings
complement each other.
Some recommendations to keep in mind:
Save even if your company fails to match. This is not
the easiest thing to do, but even if your company cuts back on
matching, it's important to try and put additional money into
personal retirement investments outside of work. You will still
realize the benefit of pre-tax contributions made to your
traditional 401(k). And, when you have money automatically taken
from your paycheck you are "dollar cost averaging".
That means the fixed dollar amount that comes from your paycheck
buys more shares when prices are low, and fewer when prices are
high. Thus your average cost per share is lower than the average
price per share.
Make sure you contribute to a plan. According to 2006
data from the Profit Sharing/401(k) Council of America, more
than 22 percent of eligible workers don't participate in
available 401(k) plans. For the companies that are still
matching, that's like giving up free money.
Continue to save while you wait to join a plan. A
significant number of companies don't let you join the 401(k)
until you've been working there a year. If that's the case, get
in the habit of putting money away for retirement anyway. Start
an individual IRA with the funds you would put in the company
plan, or set aside money in a savings account so you can
supplement your cash flow and put the maximum amount into your
401(k) once you're allowed to join.
Contribute the maximum. Not every employee can afford
to contribute the maximum allowed by the plan, but try. In 2009,
the maximum 401(k) contribution will be $16,500, and those 50
and older can make an additional catch-up contribution of
$5,500.
Don't let your company do all the work. More companies
are automatically enrolling their workers in their 401(k) plans,
but some workers fail to take charge afterward. They don't know
how much they're allowed to contribute and they don't discuss or
review the types of investments they have in relation to their
age or retirement plans. It might make sense to bring an outside
investment advisor such as a CFP® professional to review those
choices with you.
Avoid poor diversification over time. It's necessary
to do a yearly checkup on all your retirement savings — 401(k)
s, individual IRAs and other investments fueling your retirement
goals to make sure you're on track.
Don't rely on the 401(k) alone. Particularly if
matching lags for awhile, 401(k) plans can't be relied upon as a
single source of retirement dollars. You must invest outside
your company plans.
Don't over-invest in company stock. Most financial
planners advise that you put no more than 15 to 20 percent of
your whole 401(k) portfolio in company stock.
Don't borrow from the 401(k). The Employee Benefit
Research Institute® reports that employees contribute more to
plans that let them borrow. Don't be fooled. A 401(k) shouldn't
be a house fund or a source of emergency cash. You're taking
money out of the account that otherwise would grow tax-deferred,
and if you fail to pay back the money, you could face income
taxes and penalties. Instead, build an outside emergency fund of
three to six months of living expenses you can draw from.
Don't cash out. Some workers think it's a great idea
to treat a 401(k) as a windfall for when they quit a job. Don't
do it. You'll pay huge penalties and lose your retirement
savings momentum.
Don't "lose" your old 401(k) accounts. Maybe
you've changed jobs several times and never got around to moving
older, smaller 401(k) accounts from past employers to current
ones or into a self-directed retirement account. Always get
advice about 401(k) funds when you leave an employer.
September 2009 — This column is produced by the Financial
Planning Association, the membership organization for the
financial planning community, and is provided by Don McCarty of
Financial Decision Partners, a local member of the FPA.
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