Usually, 401(k) investors are a laid-back bunch. They don't tinker much with their holdings or shift asset allocations very often. In fact, a lot of them don't even check their account balances regularly.
Typically, when the market is doing well, investors make more changes in their holdings. When it's doing poorly, they tend to sit tight. But that pattern changed in 2003 when the market tanked and 401(k) participants started moving assets out of equities and into fixed income, according to the Hewitt 401(k) Index, which measures the activity of 1.5 million participants in 401(k) plans administered by Hewitt.
During the market downturn, 401(k) participants had lots of questions: Is the market going to rebound? Where should I put my money? Should I stop contributing to my 401(k) and put my money elsewhere?
Here are some answers you can use when the stock market slumps again and you're wondering how to handle 401(k) investments.
What the experts recommend
Don't panic. Don't start fiddling with your 401(k) just because stock market gyrations make you nervous. Examine how the market downturn has affected your ability to achieve your retirement goals, says Rusty Field, vice-president of American Express Financial Education and Planning Services.
If your account has dwindled because of the market decline but your investment plan is fundamentally sound, stay the course. But if you're experiencing volatility because your portfolio isn't diversified and your assets aren't allocated appropriately for your time horizon, then you should fix your 401(k).
Diversify. How do you fix it? You need to divide your 401(k) contributions among large- and small-company stocks, international stocks, value and growth stocks, and bonds. "One S&P 500 index fund is not diversified," says Guy Cumbie, chairman of the Financial Planning Association.
Kiplinger's Portfolios offer examples of diversified fund picks for long-, medium- and short-term investing. Or read "Rx for Your 401(k) Plan" to put together a collection of powerhouse funds inside your company plan.
Continue contributing. Lee says Massachusetts state employees she recently spoke to at a seminar were so worried they wanted to pull out of their 401(k) plans. Many said they'd rather use the money to make bigger mortgage payments.
"Don't sabotage your retirement plan by diverting your money elsewhere," Lee says. If you're getting a company match, contribute the maximum -- $14,000 a year in 2005. If your company matches your contribution one-for-one, you're guaranteed to at least double your money.
And now is the perfect time to dollar-cost average. By investing a fixed amount of money at regular intervals, investors can get more shares for the dollar while stocks are down in the dumps.
Know your limits. If your nerves can't handle the market gyrations, allocate your 401(k) contributions to safe investments such as short-term bond funds or money-market funds, Lee says. You might miss any immediate market up-tick, but you'll be able to sleep at night.
Where to get advice
Most employers refrain from offering 401(k) investment advice to employees, although a December 2001 advisory opinion from the Labor Department gives them the right to do so. However, some companies offer planning services as a perk.
A number of large and small companies nationwide use Financial Engines and mPower, which provide Internet investment advice to retirement plan participants. Or you can sign up for individual advice.
Financial Engines charges $39.95 a quarter ($150 a year) for advice on all tax-deferred accounts, alternative fund portoflios and forecasts for stock options.
Mpower provides a free target asset allocation after you supply some information such as your goals and investment time horizon. You can get specific advice on allocating your assets and how much to save for just $20.
Some financial services firms offer advice for a heftier fee. For example, American Express has advisers (usually a certified financial planner) who will help you develop a savings plan and recommend three investment options per asset class available in your 401(k) plan. The price tag is $600 to $700, on average.
Or, you could hire your own financial planner. Use the Financial Planning Association's PlannerSearch to find a CFP in your area.
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