Jane Bryant Quinn—Stock Downturn Forces New Approach to 401(k) Planning

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Have you been losing money in your 401(k) retirement plan? You’re probably in a state of shock.

For years, most plans have risen in value as if by magic. Almost any investment you made was “right.” Many of us actually started to think we knew what we were doing.

But lately, you may not even have wanted to open your monthly statement. On average, employees probably lost money last year, even after counting their own contribution and the company match.

Now you have to start over, start over, start over. Stop dreaming that your current mix of stocks and mutual funds will soon recover to their peak of a year and a half ago. That peak money is gone.

The only question is what you’re going to do next. To update a phrase from the laid-back ’60s, this is the first day of the rest of your investment life.

Over the past decade, retirement-plan investors have grown steadily more aggressive. The higher stocks rose, the more money people invested there.

By last year, workers were “diversifying” among growth funds, aggressive growth funds and even technology funds all of them invested in high tech, to some degree. They didn’t realize it, but they were hardly diversified at all.

Chicago-based Spectrem Group tracks the types of mutual funds that employees choose for their 401(k) money. The reports show three categories of growth funds, along with index funds, bond funds and international funds.

Spectrem doesn’t bother asking how many employees choose “value” funds, which have been out of fashion for a while. That signals to companies that value funds don’t matter. Yet, over the past year, they’ve risen to the top of the heap.

Growth funds leaped ahead of value funds in the later 1990s. But since autumn 2000, value funds have outperformed growth funds by far. If you owned value funds as well as growth funds, your 401(k) should have avoided a major loss.

It’s slowly dawning on employers that 401(k) participants (and some of the plan managers themselves) are making serious diversification mistakes. For this reason, there’s growing interest in hiring independent firms to give employees advice.

I asked four of these firms what retirement-plan investors should do now.


Here’s what they said:

– Save more money. When the size of your nest egg shrinks, you’ll need to add more cash to reach the savings goal you want, said Jeff Maggioncalda, president of Financial Engines.

– Create a genuine plan. Employees don’t understand the idea of setting a goal and then figuring out how to get there, said AdviceFrameworks president David Evans. They listen to office chat, which is more exciting but not as likely to be successful.

– Don’t jump around. Many employees moved into stock funds early last year, jumped to fixed-interest funds early this year (giving up on stocks), then moved back to stocks after the market rise in May, said mPower’s chief investment officer, Scott Lummer. Switchers usually get the worst of all worlds. Better to create a diversified plan and stick to it.

– Learn what diversification means. You’re not diversified just because you own a handful of mutual funds. You need to choose funds of different types meaning stocks and bonds, growth and value, with an index fund (one that follows the entire stock market) at the core.

“Too many people owned growth stocks,” said John Rekenthaler, president of Morningstar’s ClearFuture. It may be years before tech stocks return to their 2000 high.

– Don’t buy a lot of company stock. This appears to be one of the hardest temptations to resist. In plans that offered company stock last year, 65 percent of employees bought, risking an average of 42 percent of their money, said Spectrem’s Jeff Close.

Employees wrongly believe their own company’s stock to be “safer” than the market. They’re especially encouraged if the employer uses stock for the employee match.

Yet workers who buy the most stock for their 401(k)s earn less in the following year than workers who buy the least, said finance professor Shlomo Benartzi of UCLA’s Anderson School of Management.

To me, the right amount of company stock to own is no more than 5 percent. That’s enough.

Syndicated columnist Jane Bryant Quinn can be reached in care of the Washington Post Writers Group, 1150 15th St., Washington D.C. 20071-9200.

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