What To Do With Your Imploding 401(k)

Consider Your Time Horizon

By their very nature, 401(k) plans are long-term. Speculators react to short-term volatility by buying and selling. Long-term investors focus on their asset allocation (the percentage of funds allocated to stocks, bonds and cash). If you have the right asset allocation ' 60% in stocks and 40% in bonds for moderate risk -- the current unstable market conditions should not cause you to stray from your course.

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Next: Tip No. 2

Reevaluate Your Investment Choices

Along with making sure you have the right asset allocation, you need to make sure you have the right investment choices. Mutual funds that track an index of stocks or bonds offer great diversification and low fees. Does your plan have a broad domestic index fund that benchmarks the Wilshire 5000? This would be worthy of consideration for 70% of your stock assets. Does your plan have a broad international index fund? Consider this fund for the balance of your stock assets. Does your plan have a broad domestic bond index fund? Consider this fund for 100% of your bond assets.
Next: Tip No. 3

Check The Fees in Your Plan

It can be hard to tell the fees in a company-sponsored 401(k) plan. If you can't find out from plan materials, ask your Human Resources Department or Plan Administrator for a breakdown of all fees in your plan. A nice thing about index funds is you can be fairly certain that the fees are low since there is no high-paid portfolio manager driving the investment decisions.

Next: Tip No. 4

Consider a Target Retirement Fund

Does your plan offer Target Retirement Funds (also called Lifecycle funds)? While not suitable for everyone, the majority of 401(k) investors would be far better off putting all their assets in the appropriate Target Retirement fund rather than trying to put together (and monitor) a customized portfolio. If the Target Retirement funds in your plan consist of underlying low-cost index funds, all the better.

Next: Tip No. 5

Do Nothing

If you are properly invested and have a long time horizon, do nothing. The biggest mistake you can make now is to pull your money out of your 401(k) plan. Most people face taxes and steep penalties if they withdraw their funds before age 59 1/2. It's almost as bad to cut back on your contributions to your plan. Plus, my calculations show that young people need to sock away at least 15% of their income to meet their retirement goals ' if you started late, you'll need to save even more.

Next: Tip No. 6

If You Expect to Retire in 10 Years or Less

As retirement nears, you will have to make adjustments to your asset allocation, because your tolerance for risk will diminish. Rules of thumb: When you are seven years from retirement, reduce the stock portion of your 401(k) to 60% or less. When you are five years from retirement, reduce the stock portion of your 401(k) to 35% or less. Many financial planners believe that pre-retirees and retirees should have at least 35% of their portfolios invested in stocks at all times in order to keep pace with inflation.
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Next: Tip No. 7

Facts to Make You Feel Better

No one can predict the future. However, historical data tells us that over time, markets increase in value. In the past 50 years, a globally diversified portfolio of stocks has never posted negative returns for a ten year period. Our markets are also extremely resilient. On October 22, 1962, at the height of the Cuban Missile Crisis, the Dow Jones industrial average was 573. Six months later it was up 25%. It was up over 15% six months after President Kennedy was assassinated and over 18% six months after 9/11. Remember, the market has bounced back after troubling times before and it likely will again.
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More on the Author

Daniel Solin is a Senior Vice President of Index Funds Advisors, Registered Investment Advisors. Solin has appeared on 'The O'Reilly Factor, MSNBC's 'Weekend Economic Review,' CNN's 'Money,' and Bloomberg Television, and is a frequent speaker on investment-related topics. His latest book, 'The Smartest 401(k) Book You'll Ever Read,' was recently on the New York Times bestseller list.
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