Thursday, January 30, 2003

Your ailing 401(k) likely needs a tune-up



By Sandra Block
USA Today

Millions of workers have been receiving their year-end 401(k) statements this month, which is probably why so many of your colleagues are grumpier than usual.

You might be feeling a bit testy, too. Unless you invested your entire 401(k) plan in bond funds last year, you probably lost money. If you had an aggressive portfolio, you might have lost a lot of money.

But don't use that as an excuse to stop contributing to your plan. Instead, view your year-end statement as an opportunity to review your investments and determine whether you need to make changes. Some steps you should consider:

Prune. Most funds lost money in 2002, so the fact that a fund declined isn't a good reason to sell. But if a fund has lagged behind other funds in its peer group over a long period, it might be time to shove it overboard. Morningstar.com offers useful tools for analyzing funds.

Find out if your plan has added a better alternative. Plans have increased their investment offerings in recent years, but many investors fail to take advantage of them.

Rebalance. Most 401(k) plans offer pie charts that tell you how your money is invested among stocks, bonds and money market funds. After a year like 2002, your pie might have taken on a new look. For example, suppose your goal is to invest 60 percent in stocks, 30 percent in bonds and 10 percent in cash. Because stocks fell last year and bonds performed well, your investment mix has probably shifted to a greater percentage of bonds and cash, and a smaller slice of stocks. To keep your chosen mix, you'll need to shift some money out of bonds and into stocks.

If your portfolio is only slightly out of kilter, you might be able to rebalance by changing your future contributions, says Sue Stevens, director of financial planning for Morningstar. Invest a little more in stock funds and less in bond funds until your portfolio is back on track.

And while you're at it, take a hard look at the amount of company stock in your plan. Many companies changed their rules in 2002, making it easier for workers to sell company stock in their 401(k) plans, says Lori Lucas, a retirement expert for consultant Hewitt Associates.

Yet many workers continue to invest a large chunk of their savings in company stock, a risky investment strategy. Don't invest more than 10 percent of your savings in any single stock, including your employer's, Stevens says.

Re-evaluate. If you've altered your retirement plans in the past year, you might need to change your investment mix, says Tracey Esherick, vice president for Fidelity Personal Investments.

For example, if you've decided to retire five years earlier than originally planned, you'll need to shift to a more conservative portfolio, she says.

Consolidate. Compare your 401(k) to other accounts, such as your individual retirement account, taxable savings and even your spouse's 401(k) to get a picture of your total investment mix, Esherick says.

That way, you can determine whether your household portfolio is invested too heavily in one stock or industry sector, she says. The exercise also will help you fill in gaps in your 401(k) plan. For example, if your plan lacks a good value fund, you might want to add one to your IRA.



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