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Very shortly your 401(k) annual statement is going to arrive. Give it a close look this year. It's apt to be full of mistakes. Mistakes inflicted on you by the conventional-wisdom industry.
Roughly two-thirds of 401(k) assets are in equities, most of them large-capitalization domestic stocks and stock funds, according to Cerulli Associates. That's what the S&P 500 Index ($INX) measures, and it limped ahead in the midsingle digits last year. The balance of typical pension-plan options did no better or even did worse.
The typical worker's 401(k) is so lousy -- and utilized so poorly -- that the Pension Protection Act of 2006was created to reform the marketplace. Its key provision is to guide workers into target-retirement funds. Thanks, Congress: These are the equivalent of network television's "least objectionable programming." They aren't very good, but everything else is worse.
Except that everything else in the typical company plan isn't worse. Even bad plans can have good investment options, and nearly all offer escape from S&P 500 Index funds and other me-too portfolios of least objectionable stocks. And now, when you've got your statement in front of you, is a good time to pore over the plan and unearth its possibilities.
Here are six tips -- three things not to do and three to do -- that could rescue your retirement planning. These aren't secrets I overheard in investment-bank elevators; they're common-sense rules of elementary risk juggling. Indeed, they're in the same vein as Poor Richard's advice on how to become healthy, wealthy and wise.
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Resolve not to make basic mistakes
- Dump that stable-value plan. Insurance companies "guarantee" these plans and tout them as the ultimate in safety. According to Cerulli, 12.5% of 401(k) assets are held in these plans -- one dollar of every eight! What they actually guarantee is poverty; when you take the money out 30 years later and pay taxes on it, you'll have less purchasing power than you started with. The rate in my wife's plan is 3.6%. You can do better at a bank, and you might get a toaster, too.
- Dump that company stock. In case you don't remember Enron, it's dangerous to have both your income and your nest egg invested in the same place. Amid the creative destruction brought on by globalization, take note of these remarkable facts unearthed by Leuthold Group in Minneapolis: "Back in the 1930s, a company joining the S&P 500 list could expect to remain there for 65 years or so. At present, the average life of an S&P 500 company is around 15 years."
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Actually, Enron's meltdown early in this decade did make an impression on retirement savers. Since 2001, assets held as company stock in the nation's 401(k) plans have declined to 13.7% from 18%, according to Cerulli. But 13.7% is still way too much. Many companies fund their matching contributions with their own stocks, but you can often convert company stock to something else the next year. This is the next year.
- Demote that me-too big-capitalization growth fund from the majority of assets to the minority. Tom Modestino, a Cerulli senior analyst, says 51.4% of 401(k) assets are held in equity funds and that "large-cap domestic is the biggest chunk." A more reasonable allocation to domestic big-cap stocks is 20% or so.
Continued: 3 ways to earn more
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