Action Line: Improve your 401(k) by staying aware of options
BY PHIL MULKINS World Action Line Editor
Sunday, December 02, 2012
12/02/12 at 3:40 AM
Dear Action Line: How do I decide what to do with my 401(k), such as asset allocation and contribution amount? The company literature says "stay the course," but I hear roaring off in the distance. - N.T., Sand Springs
A September 2010 Charles Schwab study found just 47 percent of 401(k) participants feel "very confident" making investment decisions, says the Bankrate.com website. Financial planner Jennifer Lane, author of "The Complete Idiot's Guide to Protecting Your 401(k) and IRA," says many people are so confused about what to do with their 401(k)s and other employer-provided plans they just ignore them.
Default contribution rates: Employer retirement plans often automatically enroll new employees in their plans, typically at salary contribution rates of 3 percent to 6 percent. This is just adequate as it equals the rate at which most employers will "match," but Lane says workers need to save 10 percent to 15 percent of their income for retirement, and some financial planners promote 20 percent.
Asset allocation: Deciding how to invest your retirement funds - what portions to allocate among stock funds, bond funds and short-term investments (money market or stable value funds) - is guided by your risk tolerance and the time left before you retire. Are you a gambler or a mattress stuffer? Lane says you should look at the target-date funds for your retirement age, pull up a chart on that fund and look at the volatility to decide if you're willing to take a rough ride or need a more conservative target-date fund. Even if you're not in a target-date fund but follow its asset allocation formula within 10 percent to 15 percent of the mark for your age in investment categories, you'll be in good shape.
Investment styles: Lane recommends using Morningstar.com's Style Box ( tulsaworld.com/morningstarstylebox) to decide which fund to invest in. This is a nine-block grid designed to classify and aid in the evaluation of stock and bond funds. With a stock fund, the grid's vertical axis indicates market capitalization of the fund, spanning from large companies at the top to small companies at the bottom. The grid's horizontal axis shows the range of investment styles ( tulsaworld.com/bankinvestmentstyles) from value at the left to growth at the right and their "blend" in the middle. Picking funds regardless of their basics leads to chasing performance by comparing apples to oranges.
Free advice: The Schwab survey found that only 10 percent of 401(k) participants whose employers offered third-party investment advice as a benefit actually used the service. Of those who did take advantage of the offer, 70 percent made adjustments to their plans that nearly doubled their savings rates. Those who received professional guidance also had more diverse portfolios than those who did not.
Financial news: Never make investment decisions or changes in your investment plan based on market swings reported in the financial news. See Bankrate.com's Jan. 14, 2011, retirement blog article, "The stock market's wild ride" ( tulsaworld.com/bankmarketwildride). Volatility in recent years is enough to make even the most knowledgeable investor nervous. To prevent overreacting to any one piece of news, broaden your list of sources covering it, looking for different points of view. You are still better off setting a plan and sticking to it - no matter how wild the ride. All we have to fear is fear itself.
Original Print Headline: Keep informed on options to improve your 401(k)
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