Get a Grip on Your 401(k) - Financial Planning

It's a sad fact that few 401(k) plan participants are even aware that they can make investment allocations or otherwise direct the way that their plan contributions are invested. Of those that do know, most simply don't know how or where to begin.

The vast majority of plan participants have no other investing experience. Few have ever heard of or even considered the theories and concepts behind investing. The little information that they may have generally comes from television, newspapers and magazines, or co-worker conversations. And most of that is erroneous, sensationalized, and lacking any real theoretical foundation.

Often, the plan contribution election forms are presented to new employees along with all of the other new-hire paperwork -- insurance documents, confidentiality agreements, W-2 forms and the like -- all to be completed and returned the next day. Daunting legal jargon and overriding priorities of the moment may force a selection of anything which sounds familiar, usually the first low-risk, fixed-income vehicle that's available. And that last-minute, afterthought attitude toward one's retirement funding is exactly what has led so many people into the position of having to struggle during their latter years, and has postponed, if not cancelled completely, even the very notion of being able to retire.

But take heart; if you were pressured into making an immediate decision concerning your plan options, all is not lost. Most plans allow the freedom to transfer between investment options on a daily basis if you want to. Of course, this freedom isn't meant to be used to chase the latest hot pick or attempt to time the market. (Both of these strategies have an extremely low probability of success and are ineffective in adding value to your investment portfolio.) Rather, it's to provide you the opportunity to rebalance, or correct your choices, as you become a more informed and experienced investor.

In order to make informed choices, you'll need to educate yourself on some basic investing concepts. You must also become familiar with the specific rules of your 401(k) plan. If you don't already have one, get a copy of your plan's summary plan description (SPD). Seek out a plan representative or financial consultant who can explain the various investment alternatives to you. You'll also want to know how the plan is monitored. Most programs have a long-term, systematic method of monitoring investment progress. If you're going to take an active role in directing your investments, you'll need to know how you can receive periodic performance results.

Many participants are under the impression that the money in their 401(k) accounts is insured against loss. Well, that's true and false, depending on the type of loss that's being referred to. Once your money enters the 401(k) trust, it's protected by insurance against fraud, embezzlement, or any other criminal activity. However, your funds are not insured against investment losses. The only way to protect against market losses and still achieve a reasonable growth rate of return is by creating a portfolio with an optimal combination of investments for your specific level of risk. Remember, the higher the expected growth of the investments, the higher exposure to risk you're going to have. The lower the risk, the lower your expected return will be. But keep in mind another very powerful element; namely, the risk of not having enough money to meet a financial goal, such as your retirement.

blog comments powered by Disqus