All of those buy-stocks-for-the-long-haul lunchtime seminars must have kicked in, because more than 70 percent of new 401(k) money is rushing into stocks and stock-buying mutual funds, reports Access Research. If not a market top, it’s at least a sure sign that attention must he paid.
Steel yourself for some negative numbers when the current market “corrects” and do some soul searching: if you’re the type to bail out after the market drops, just get out now and move your money to bonds and guaranteed investments.
Better still, show fortitude and stick with stocks. But by all means, spread the wealth. International stock funds offer a tried-and-true way to earth growth and offset American cycles, yet almost nobody is investing in them even though they’re available in a third of all plans, says David Wray, president of the Profit Sharing/401(k) Council of America. If you have big stock winnings, restructure your portfolio by selling some stock funds and buying others that invest in corporate, mort-gage or Treasury bonds until you are back at your target of 60 to 70 percent stocks.
Beware of some of the new choices, especially those that Jim Sullivan of Arthur Anderson says look like “more hype than help.” So-called “lifestyle” funds claim to design portfolios to suit your age; in fact, they may simply split your money between stocks and bonds and charge an extra fee for the service. “Synthetic” Guaranteed Investment Contracts (GICs) are heavily promoted as safer than the last generation of guaranteed contracts, many of which went bad when their insurance-company sponsors couldn’t support their guarantees. This new breed is composed of bonds wrapped in an insurance-company promise. You pay for the bonds and the promise, and it’s still only as good as the insurer who wrapped it. If you want to buy peace of mind, make sure the bonds inside the package are rated A or above, warns Hewitt Associates’ David Veeneman.
It’s too much of a good thing; most 401(k) plans are awash in their own company stock. Firms often match employee contributions with their own issue, and employees have enough loyalty, lethargy or blind faith to hold it all. But at current levels approaching 40 percent of the average 401(k) portfolio, this is a hazard and the ultimate in nondiversification. If your company hits the skids, it’s not just your job, it’s your nest egg, too.
Linda Lubitz is a financial planner whose own $10,000 retirement-fund holdings in Amerifirst Bank became worthless when the bank was taken over by the Resolution Trust Corp. She now tells clients to switch to broad-based stock funds as soon as their company stock is vested. Even if you love your company, 10 percent of your retirement fund is probably the most weighting you’ll want to give it.
Borrowing from yourself, more and more employees are finding, can be a mixed blessing. About one in five participants has already drawn against their own 401(k) assets to fund houses, tuitions and doctor bills. But new research shows borrowers may be shorting their own accounts.
How so? Borrowers are repaying themselves at interest rates in the 5 percent to 7 percent range, far less than their money would make flit were invested. Loan origination fees can run $100 or more, and sums spent repaying loans cut into the funds available for new contributions. The biggest hazard of lending to yourself: quit or get canned, and the loan comes due in 30 days. If this still looks good to you, find a bank loan backup you could grab if the ax falls.
And don’t think you can’t blow your retirement fund on pantyhose and parties, if you’ve the urge to self-destruct: Banc One is just months away from issuing a 401(k) credit card.
There’s feverish competition for 401(k) contracts and employers are being promised the moon- ever-lower fees for higher returns. Don’t be surprised if your employer switches horses and you get stuck midstream: New Jersey benefit consultant Rich Koski says he’s seen companies freeze assets for as long as six months while they change 401(k) providers. You should get warning of a blackout. As soon as you do, race to make portfolio adjustments you’d prefer not to postpone. A typical blackout lasts about a week before your new, improved plan comes online with . . . yes, more choices.
