Safeguarding Future Of Your 401(k) In Tough Times
OCEAN CITY - For most 401(k) investors, the economic and market turmoil has had a sobering effect on their employer-sponsored plans. Still, as difficult as it may be to review your 401(k), now is an important time to take a hard look at the way your plan is constructed.
Bull markets mask flaws in a portfolio, says James F. Ade, Vice President and Retirement Solutions Specialist for Merrill Lynch. 'That's because people tend to take gains for granted. But when markets struggle, there's less margin for error, so underperforming investments or imbalances in the way your portfolio is structured can really stand out,' he said.
A careful review of your 401(k) can help you identify changes that can strengthen this important retirement vehicle. Here are six ways to help you correct any imbalances in your plan that the market may have created, and position your retirement plan for better times ahead.
Check your diversification. A 401(k) plan might offer 15 or 20 fund choices, ranging from conservative fixed income to aggressive growth equity funds. According to Ade, investment in five to seven funds spreads risk while keeping management relatively simple.
Rebalance. Make sure your choices reflect your personal risk profile and your nearness to retirement. 'For example, a moderate investor might target a mixture heavily weighted to large-cap growth funds, large-cap value funds and fixed income, with significantly less in international equities and cash,' Ade says. 'Yet market volatility can easily skew those proportions •€' some funds may drop sharply while others maintain their value or even gain.'
Ade urges investors to consider their 401(k)s in the context of their overall assets. The sum total of your holdings •€' not just your 401(k) investments •€' needs to be in balance.
Identify poor long-term performers. Checking each fund you hold against its peers can help you determine whether that fund's performance, good or bad, is due to market forces or whether your fund has underlying problems. You can tell how a given fund has performed over the past one, three, five and 10 years, relative to an index of similar funds provided by monitoring agencies such as Morningstar or Lipper.
Assess fund fees. Some funds charge fees (typically a percentage of your overall purchase) when you buy shares and again when you sell. This can become costly as you adjust your portfolio.
Implement changes carefully. Fixing your portfolio during a troubled market raises a fundamental question: How can you avoid losses from selling at depressed prices? If your portfolio is only moderately imbalanced, one simple strategy is to apply your changes moving forward with each new contribution from your paycheck. Over time, your assets can rebalance without selling a large number of shares, Ade says.
Evaluate the features of your plan. Even the best 401(k) strategy will be hard to implement if the plan itself offers few choices or restricts your ability to change investments. 'It's best to have an open architecture with multiple funds and managers, rather than being locked into one proprietary fund family,' Ade says.
It's not inevitable that assets leak out of your 401(k) by virtue of changing markets, poor choices or high fees. By taking your plan through this six-step process, you can see to it that your retirement savings account is positioned to weather turbulent markets and make the most of more bullish times.
(A Merrill Lynch Senior Financial Advisor. She can be reached at 410-213-8520.)