How you can save your 401(k)

By Tim Middleton

My son Michael told me last week that even though he had tucked $1,200 into his 401(k) recently, by the time he got his statement he was ahead by only $12.

He's 30, and he told me this with a rueful laugh and a shrug. He knows he's got time to make it back. And neither he nor anyone else in the family is cutting back on retirement contributions, including his old man.

Yes, things have been bad out there. Congress' top budget analyst said last week that Americans' retirement plans had lost $2 trillion in the past 15 months, a report that drew headlines everywhere.

The explosive late-day declines that have marred the U.S. stock market recently (before Monday, anyway) are evidence of forced sales to meet massive mutual fund redemptions. People have been cashing in funds. And that is a real disaster.

• Talk back: Taking a hit in your 401(k)?

Most Americans have few investments outside their 401(k)s, meaning they have been sacrificing their retirement plans -- the ultimate long-term investment -- to short-term panic. Bad mistake.

Now is the time to rescue your 401(k) plan, not flee from it.

I know from reader e-mail that many folks have suspended contributions to their plans, which is like poking a hole in the life raft you'll eventually be confined to for decades in retirement. And I know from conversations with financial advisers that it is older workers, whose need for this money is most immediate, who have been panicked most of all.

But remember this: Investors in every bear market since the tulip-bulb mania of the 1600s have gotten just as rattled, and the winners stuck with it even though, every time, somebody was proclaiming, "This time it's different!" This time, some people are arguing, capitalism itself in under threat, meaning markets as we know them will never come back.

Baloney. It's never different. The climax of a bear market is always the most gut-wrenching part.

Here are six ways you can not only survive but actually prosper. Remember, every seller in the stock market needs a buyer. Amid so much selling, buyers keep coming up with plenty of cash. Do you suppose they got that rich by being stupid?

The easiest money to make is free

Most 401(k)s shower free money on participants in two ways. First is the employer match. Second is the tax deduction. If you contribute $200 and the boss chips in 50%, that's a free $100. And your $200 costs you only $150 out of pocket, if you're in the 25% tax bracket, because you'd otherwise pay $50 in income tax. So you are up $300 on $150, a 100% gain, before you even get started.

Think about it that way, and the next time somebody asks how your portfolio is doing, you'll be able to modestly, and honestly, reply, "Oh, I'm ahead."

Take a ride on the Reading

In the game of Monopoly, owning all four railroads is sweet: You get rent on every side of the board. You can't build hotels, so you won't get rich, but you do have reliable income. The 401(k) equivalent is cash, or close to it.

"If you're close to retirement (two to three years) and can't sleep with the volatility, change your future contributions to be invested in a less volatile option, such as a stable value fund," counsels Cheryl Krueger, the president of Growing Fortunes Financial Partners in Schaumburg, Ill. If not stable value, then a money market fund. Cash is king in markets like this.

This is strictly a stopgap measure, but it guarantees you'll have more than $12 when you need the money, and guarantees are an antidote to panic.

Do a rebalancing act

A good 401(k) is well-diversified, meaning you own a mix of funds invested in foreign and domestic stocks as well as bonds. Despite the credit crisis, most bond funds have held up well, even as U.S. stocks have tumbled more than 40% in a year and many foreign stocks even more.

Those numbers actually make this is a good time to cut back oversize bond positions and plow the proceeds into beaten-down stocks. The way to win is to buy what's down.

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"This is the process used by professional investors (and) wealth managers for their clients," notes Bruce Barton, who is just such a wealth manager at Prialta Advisors in San Jose, Calif. "The process is contrarian and forces you to sell high and buy low."

If you are within 10 years of retirement, I would rebalance into U.S. stocks. My rationale is that, after more than seven years of decline, the U.S. dollar is rallying and our stocks are likely to outperform those of other developed markets, whose currencies stand to decline.

Continued: Now might be the time to buy

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