Winning 401(k)

Many financial analysts think we’re headed for a long period of below-average market returns.  Me, I believe in the resiliency of our market economy and continue to invest agressively for the future.  I know that how much you save is even more important than the return you achieve. 

It will be more important than ever to save as much as you can for retirement.  A new AARP survey showed that more than one-fourth of workers ages 45-64 say they've postponed plans for retirement because they're not saving agressively enough. 

Nearly half of Americans have less than $25,000 in retirement savings according to the Employee Benefit Research Institute. 36% of workers older than 55 have less than $25,000.

If you’re like other American workers who say that they will depend most on employer-sponsored plans like a 401k, now is the time to find your latest 401k statement or go online and see how you’re doing. Here’s how to tune-up your portfolio:

Contribute enough to get your 401(k) match.

One-third of all workers with 401(k)s fail to invest enough to earn the full company match, including nearly two-thirds earning less than $25,000 whose contributions fall short. A dollar-for-dollar match is getting 100% return on your investment, literally a no brainer. Matching 401(k)s – even if it’s 50 cents on the dollar – are the best investment option available to you.

Reduce your investment in company stock.

Routinely I see this as a major mistake among my clients and radio/podcast listeners.  Currently, 25% of 401(k) participants over age 60 have 50% or more invested in company stock. I have seen 100% in a few cases. Do not do this! A single stock is much more vulnerable to fluctuations than diversified mutual funds. I recommend no more than 5% invested in your company stock.  I know this is a sticky point for many of you, but dare I say Enron, Lucent, Cisco, ...

Choose good diversified mutual funds aligned with your risk tolerance.

Nearly 4 out of 10 workers have 401(k) portfolios that are inappropriate for their age or tolerance to risk. The problems range widely, from young workers investing too conservatively to older employees too aggressive. A balanced portfolio can be achieved in your 401(k) many ways, from choosing an age-specific life-cycle fund that changes its investment mix as you move closer to retirement to choosing a well-balanced group of mutual funds yourself. Your chosen mix would have a combination of stock and bond funds that reflect your tolerance to risk. You can also invest in a balanced fund which mixes both stocks and bonds in a more conservative fashion.

Pay attention to your mutual fund expenses.

Take a look at the summary prospectus for your fund. You may find an expense ratio of almost 2% for some funds. The expense ratio should be no more than 1% for a stock fund and .75% for a bond fund. If your 401(k) plan uses expense-friendly fund families such as Vanguard, you may find expense ratios less than .25%. You want to make sure the fund is a good performer over the long-term – preferably a 10 year track record – but don’t overlook expenses. Expenses are like making your investment run through quicksand.

So, there you go.  Do these quick changes to your portfolio (should be no more than an hour of work) and you'll be prepared for any storms ahead.  Yes, we may see mediocre market performance for a season or two ahead.  Yes, you can weather the storm and come out with a clean deck.  The key is positioning yourself to take advantage of the big gains we typically see as the market rebounds -- and not find yourself sitting on the sidelines when it happens.   See you in the game!