ARCHIVE: IT CAREER EXPERT
The secrets to 401(k) success
Kevin Ferguson
03.12.2003
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Many Americans -- particularly technology workers in their 20s and 30s -- are far too aggressive in their retirement strategies. The ironic result: it will actually take them longer to retire than less gung-ho investors.
High-tech workers already know the dangers of the stock market. They got burned at the height of dot-com mania by opting for low salaries that came with the promise of high-equity stakes. Or they watched their savings accounts evaporate as they pumped thousands of dollars into "surefire" stocks. Despite the hard knocks, techies still take unnecessarily high risks with their 401(k) plans.
"Go for the averages," said David L. Wray, president of the Profit Sharing/401(k) Council of America. "Don't swing for the fences."
That advice is sound, regardless of whether your 401(k) portfolio is more laden with bonds, stocks or international-market funds. Retirement plans are no place to make a quick buck. Pick a strategy, let your portfolio manager execute it, and review it once a year to see whether your funds need to be rebalanced.
But should you be shifting more of your 401(k) money toward individual stocks, stock mutual funds, bond funds, international-market funds, or something else? Conventional wisdom has said to keep your 401(k) plan balanced, with no more than 70% equity funds that include a healthy mix of "value" and "growth" stocks, and 30% fixed-income funds, such as government bonds. With such a balance, you can expect a reasonable rate of return, about 8%, over 20 years. That's far more than a money market or a certificate of deposit, and far less risky than the stock market.
But bonds are boring. And younger investors may recoil at the notion of investing money in anything so milquetoast. After all, 10-year government bonds, for example, may offer an annual yield of only 10.6%, while a well-managed stock mutual fund may offer returns of more than 19% in the same time. But bond funds, say many advisors, are far less risk
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y, and younger investors, many of whom keep an equity-fund balance as high as 90%, should reconsider their investment strategy.
Of course, times are changing, and so is some of the advice. Some experts suggest loading up your 401(k) plan completely with stocks, with a pinch of international funds -- say, 10% of the overall value of your portfolio. The logic is that, if properly rebalanced once a year, stocks will outperform bonds over the long haul. "Never did a fixed-income fund beat the stock market over a 30-year period," said William Barton Boyer, president and senior partner of Parsec Financial Management Inc., Asheville, N.C. "Sure, investing just in bonds lessens the volatility on the downside. But there's more volatility to stocks on the upside over time."
Regardless of the mix of stocks and bonds, you need to rebalance at least annually, Wray and Boyer agreed. What does that entail? Say you chose a plan with 70% equity funds and 30% fixed income. The equity portion did moderately well, so that after 12 months your portfolio has grown to where 80% of your 401(k) nest egg is now in equity markets. In that scenario, you should sell some of your high-performing stocks and buy some underperformers. The idea is to lock in the year's gains and return to the 70/30 balance with which you began.
Other tips:
Don't over-manage your plan. Choose one day a year -- your birthday or your anniversary, for example -- to rebalance your 401(k) plan. Statistically speaking, those who rebalance once a year do better than those who either never rebalance or do so frequently.
Stick with it. The idea is to continuously save even if you need to reduce the amount of each contribution. Why? Besides being good practice, regular contributions give you the benefit of "dollar-cost averaging," which is basically a way of playing the averages and can be especially useful when you're dealing with volatile investments.
If your company employs fewer than 100 workers, make note of when your 401(k) statements are mailed to you. Mark them on a calendar, set up an automatic e-mail reminder, or whatever. You want to make sure that your company is managing the plan correctly. Although it's very unlikely that there's anything to worry about, haphazard mailings might signal a problem, and companies with fewer than 100 employees are not subject to automatic auditing of their 401(k) plans.
Most important, do something. Don't be like most of your co-workers, who let their 401(k) plans languish for years without so much as a glance.
Kevin Ferguson is a freelance writer based in Brookline, Mass. He's been published in Forbes, BusinessWeek, and is the former editor of Computer Retail Week.
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