Your best 401k moves for 2010

By Investopedia

The S&P 500 Index ($INX) had a banner year in 2009, one of the best in the past century, racking up a 25% return after the 37% drubbing the year before. But not all investors were raising their glasses at the end of 2009.

With so many skittish after the crash of 2008, many spent the year avoiding or limiting contributions to 401k retirement plans, while others moved their retirement nest eggs into bond and cash funds, which, while stable, didn't provide nearly the boost of the stock market.

When the market hit its lows in early March 2009 and started to rally, few investors had the full allocation in stocks that they needed to get the maximum return. In fact, according to a new study conducted by the Investment Company Institute, a trade group for the mutual fund industry, about 90% kept their asset allocations the same between January and September of last year.

Indeed, most of us spent 2009 too frozen to get back into stocks and missed out on the best run in a decade. Yet that same survey discovered that 73% of us still feel confident that our 401k can help us reach our retirement goals.

In the spirit of the latter (correct) conclusion, here are a few 401k moves to help you survive 2010 -- or, for the optimistically minded, we can call it a revival guide for your retirement assets. But before we begin, it's worth taking a moment to reflect on just how vital the 401k is to the modern worker.

The 401k landscape

The 401k program is today's pension system. For the majority of working Americans, the 401k is the only retirement vehicle that can realistically become a sizable chunk of one's retirement nest egg. The ability to set aside pretax money -- and in many cases get a percentage of your savings matched by your employer -- can't be beat in terms of bang for your buck. (Those with a traditional pension as well may be interested in "Chipping away at the pension freeze trend.")

Because 401k funds are paid out of pretax dollars, investors can essentially earn a free return equal to their tax rates. So a hypothetical 401k pretax funding of $1,000 would only take $750 out of your paychecks, assuming you paid at the 25% tax rate.

The general consensus on 401k advice is twofold: First, you should always try to contribute as fully as possible, at the very least, up to the percentage of your income that the company will match. That is just plain free money. Second, you should seek out diversified investments in stocks and bonds, whether you have just a few options in your plan or hundreds.

Save your riskier investment choices for taxable accounts. (Employees have a love-hate relationship with 401k's compared with other retirement options. Read more on this in "Pension plans: Pain or pleasure?")

And now, those five moves to renovate your 401k:

1. Know your company's match policy

After limiting company matches or cutting them altogether during the recession to save money, many companies are reinstating their matching-funds policies in 2010. Starbucks (SBUX, news, msgs), American Express (AXP, news, msgs) and, just recently, JPMorgan Chase (JPM, news, msgs) are included in that list.

Check with your plan manager to see what the current status of your plan is, and, if you need to, press your plan sponsor or human-resources director for information.

2. Know your real asset allocation

Every investor should know his or her overall asset allocation by including all invested assets. This should include any individual retirement accounts, taxable accounts and even side investments such as gold and real estate. Your 401k is an essential piece of this puzzle.

Most 401k plans offer a number of free transfers among investments per year. Use this to your advantage and shift things around to get your total asset allocation where you want it to be.

If you're under age 40, aim to have at least 60% of your total asset allocation in stocks; you've got enough time until retirement to let the historically higher returns of stocks outweigh the potential for an off year. If you're within 10 years of retirement, it's time to transition the lion's share of your nest egg into fixed-income (bond) assets or blended mutual funds that offer exposure to corporate and municipal bonds as well as U.S. Treasurys. (The retirement income distribution methods in "3 ways to make your retirement funds last" are all workable; the one you choose will depend on your personal circumstances.)

Continued: Know your fees

[Related content: funds, investing strategy, 401k, retirement, Vanguard]

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