Why Some Company Matches Fail to Match Your Objectives

Just because there is a company match doesn't make it the match you should take.

We know about diversity.  We know about spreading the risk.  We know that we are supposed to be investors, eyeballing retirement. We should know better. Why then, do we continue to take the offering of the company's stock in our 401(k)?

There are several reasons.  First of which is how your company’s 401(k) plan in structured. When an employee becomes eligible to begin investing in the plan, they often find that the company match, the funds the company invests with you, up to a certain percentage, is often only offered in the company’s stock.  And because we are always suggesting that the employee take the company match, at the very least, they take our advice and begin to load up their portfolio with shares of their employer.

Often, when this sort of offering is available, it is one of the few buy-and-hold restrictions in the plan.  That means that if the fortunes of your company drop, for whatever reason – poor quarterly earnings, lackluster forecasts or simply a cyclical turn of events, the employee must ride out the downturn. This can be a big deal if the employee is long-term and because of that, has a huge chunk of their retirement tied up in that stock.

More on owning stock in your company.

Paul Petillo is the Managing Editor of Target2025.com

Retirement Planning: Fixed Income is Worrisome

If retirement is the goal, why would you handicap your chances of arriving when you imagined? Evidence of this shift has challenged those imaginations: Year-to-date  (third quarter 2009), the US household sector is shown to have purchased $529 billion of US treasuries. Granted, a great deal of this was due to money flowing into more conservative 401(k) investments via mutual funds. This pace, the purchase of approximately 45% of what the Treasury was selling, is four times that of the previous year.

This sort of immunization has not gone unnoticed. The problem with many of these commitments to a more conservative approach may be creating a bubble of their own.  These types of debt instruments are based on price and yield.  As one goes up, the other goes down.  The more someone is likely to pay for a bond, the lower the yield that is offered. 

If this sort of pace continues, and it looks as if it may as the temptation to be able to even consider retirement strengthens as the economy gradually improves.

But with more people flocking towards these fixed income investments, the price paid will begin to become unattractive, in large part because inflation remains benign.  That won’t last forever.  And when those conservative investors begin to realize that the yield is now negative to inflation, the selling will begin.

The real paradox will then kick in.  Now what? More

Should You Shift Your Investment Style Now?

If a picture or in this instance, a graph could speak volumes, this one would. In 2009, actively managed funds, despite lower inflows, outperformed their respective benchmarks handily.

In any given year, a handful of active mutual funds will do better than the benchmark index fund. And investors are usually warned, and I obligated to as well, that what is hot today or last quarter, even over the past year in all likelihood will not be so after you invest. This is why it is always recommended to look much further afield, at least five years, ten is even better see how well a fund has performed.

Should you switch your investment style in your retirement portfolio as a result? Read more here.

Paul Petillo is the managing editor of Target2025.com.