Thursday, January 7, 2010

Your 401K Retirement Plan: Is it What You Know?

Can too much information be a bad thing? As we enter in the next decade, already eight days old, most of us have broken, or fudged just a little, on the New Year's resolutions we promised ourselves. In many cases, these commitments to change your lifestyle, reverse the bad habits, or embrace some new ones are often loftier than life allows. While change is good and change is constant, it is also incredibly difficult.

Now we have two senators attempting to give 401(k) investors a glimpse of their futures. Currently, the Social Security Administration does this in the form of a projection delivered to you just before your birthday. This statement is designed to help you track your employer contributions. But it also gives you some idea how much monthly income you can expect. For numerous people eyeballing retirement, this is the jumping off point. From here, they make calculations on how much they will need to save on their own to make up the difference in what they perceive as a livable, post-work income. The question is: would this be helpful with your 401(k) balance?

In many cases it would. But in an equal number of instances, it could be more trouble than it is worth. The bill introduced to the Senate by Jeff Bingaman, D-N.M., Johnny Isakson, R-Ga., and Herb Kohl, D-Wis. would require plan sponsors to give a snapshot of the future, a look at how much your 401(k) is worth in real dollars, calculated with inflation in mind. (Even Social Security doesn't take their projections that far.)

AARP, the Women's Institute for a Secure Retirement and the Retirement Security Project all support the idea of giving current workers a glimpse of where they stand in the future based on what they are doing today. Those blessing offer a counterpoint to the criticisms that have arisen to the proposed bill.

Consider where the vast majority of us are. After things went south in 2008 and early 2009, three things happened to the 401(k). One, many of us stopped contributing in part because our employers stopped matching those contributions. Two, we moved to the sidelines taking our losses into cash or other types of conservative investments. Or three, we moved what was left in a target date fund.

This investment interruption will come back to haunt us. But it is an indication that we have not come far enough along in this journey to call ourselves smart investors. Had we done nothing: kept our portfolios where they were, kept investing even if the match disappeared, and even increased that contribution if the match went away, we would be back to even if not further along. But we didn't.

And now, the good senators what to tell you how bad things really are. If you look at the average account balance, which is estimated all over the place by whomever you happen to talk to, the average monthly withdrawal rate from your 401(k) when you retire is around $300 a month. The Employee Benefit Research Institute and the Investment Company Institute made their calculations based on year-end 2008 account balances of $45,519. If you use that number, the monthly distribution would be closer to $225. Scary to think that all your 401(k) will do is pay your utility bills.

The critics fear that this sort of information will force folks to invest in riskier investments to try and regain some of those lost portfolio balances. While that might be an okay maneuver for the younger investor (40 years or younger), the older you get, the more worrisome this is. If you fall into either of these groups, the same advice applies:

1. Increase your contribution. Most of us average about 6-7%. Even a couple of increased percentage points can have some long-range differences in that balance at the time of distribution.
2. Get out of your company stock. Investors remain over invested in one company and no one worth their mettle will tell you this is good idea. Even if your company is on a tear. If your 401(k) matches only with company stock, invest only to the match.
3. Have more than one fund. Many folks are either indexed in an S&P500 fund or fully invested in a target date fund (one that picks the year you want to retire and adjusts your portfolio accordingly). Spread your risk. You will need to take some in order for your money to grow and many of us will want to take more than we should. By spreading it around among three of four funds, you can at least be more helpful to your retirement than harmful.

Paul Petillo is the Managing Editor of

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