Avoid short-term moves in your 401(k) that you might regret

The Dallas Morning News (MCT) - If you've mustered up the nerve to look at your 401(k) statement lately, the word shocked is an understatement.

Millions of American workers lost an average of 27 percent of their 401(k) retirement savings in 2008, according to a study released last week by Fidelity Investments.

The average 401(k) balance went from $69,200 in 2007 to $50,200 last year because of dramatic market declines, the study found.

"It's been a lot of sticker shock," said Lynn Lawrance, a certified financial planner at Financial Network Investment Corp. in Dallas.

Although you may want to tweak your 401(k) to save what's left in your account, be careful not to make short-term moves that will be costly in the long run.

"Discipline and controlling investors' emotions are what is so hard right now," said Greg Gardner, a certified financial planner and founder of the Gardner Group in Dallas.

Here's what financial experts are advising:

_ Keep contributing.

Whatever you do, don't stop contributing to your 401(k) or reduce your contributions.

In fact, the market decline has made it necessary that you save more, not less, to be financially solvent in retirement.

"While it is very natural for people to want to reduce their contributions now _ I am sympathetic to the emotional appeal _ it is really an action that someone is likely to regret," said Steve Lipper, director of retirement marketing at Lord, Abbett & Co. LLC, a money management firm. "Once people get used to a lower level of savings, it is more difficult for them to increase their savings again."

What's more, "at some point, Social Security and Medicare may be scaled back, so it may take more on your end to fund your retirement goals," Lawrance said. "So cutting back would be cutting back on what you will have available in retirement. It would be a mistake."

If you're worried about losing your job, begin now to cut back on spending to shore up your emergency fund and continue to fund your retirement. Don't stop saving for retirement unless you absolutely have to.

_ Get matching funds.

Contribute at least enough to your 401(k) to get your employer's matching contribution because that's free money.

Unfortunately, more and more companies are suspending matches to their 401(k), removing a key incentive for workers to participate.

That also costs workers the benefit of future tax-deferred compounded growth on the employer match. You do still get tax-deferred compounded growth on money you put in.

If your employer's match disappears, you shouldn't stop funding your 401(k), but you should evaluate the quality of investment options in the plan and whether you have a good selection from which to choose, Lawrance said.

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Consider supplementing your 401(k) with an Individual Retirement Account _ either a traditional IRA or a Roth IRA, depending on your circumstances and income, she said.

That would give you a wider selection of investments and, in the case of a Roth IRA, would diversify your taxation because you don't pay tax when you take money out for retirement if you meet certain conditions, Lawrance said.

With a 401(k), you pay tax when you withdraw the money.

_ Assess your timetable.

Determine how long it will be before you will need your retirement money. The more time you have, the greater the chance that you will recoup your losses and "the more you should be looking at this as an opportunity (to invest at bargain prices)," Lawrance said.

If you're close to retirement, consider adding less risky investments such as bonds to your portfolio to cushion against ups and downs in the stock market. Talk to a financial adviser.

"The question is, is the asset allocation you have in the 401(k) appropriate for your risk tolerance?" Lipper said.

If you had some money in high-quality bonds last year, "you probably lost half as much as the average stock investor," Gardner said. "There's a difference between 20 percent down for year end and being down 40 percent."

But realize that bonds aren't risk-free. In fact, prices of corporate and mortgage bonds sank to new lows last year and yields soared. Junk bonds had their worst-ever year.

"Just ask yourself, do you want to fall off the front porch or do you want to fall off the roof?" Gardner said. An additional investment in bonds "makes the comfort level a whole lot more tolerant," he said.

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_ Stay informed.

The stock market's collapse has revealed the vulnerability of America's retirement system, said Christopher Jones, chief investment officer at Financial Engines, an investment advisory firm that works with companies and 401(k) participants.

Many workers aren't making good investment decisions in their 401(k) and need help, he said. They may put too much in company stock and conservative investments that may hurt their ability to accumulate enough savings for retirement.

"We live in a world where large numbers of investors are going to have to bear their own investment risk, so it's critical we give people the tools they need to make good decisions on their own," Jones said. "You just can't let people do whatever they want because too many people are going to make mistakes and they will be paying a substantial penalty for that."

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For workers unable or unwilling to make informed choices, 401(k) plans should help them through automatic enrollment, automatic escalation in contributions and having independent professionals manage their investments, he said.

"The 401(k) is still the most important retirement system for the vast majority of working Americans," Jones said.

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© 2009, The Dallas Morning News.