4 Tips for 401(k) Participants

How to best use the most popular retirement plan during any market.

Roger Wohlner

Market volatility continues to provide investors with a wild, scary ride. In the face of this market turbulence, here are four timeless tips for 401(k) participants:

Continue to save. During the 2008-2009 market decline, many 401(k) participants lowered their deferral rates or stopped salary deferrals altogether. According to a recent study by Fidelity, 401(k) participants who stuck with their allocation plan and continued to save through the downturn have seen their accounts grow between September 30, 2008 and June 30, 2011. This far outstrips the results for participants who totally existed equities and never returned, and those who got out and then got back in at some point. The point is that consistent savings and sticking with a plan plays a key role in accumulating 401(k) assets over time.

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View your 401(k) as part of your overall portfolio. Far too many participants view their 401(k) accounts in a vacuum. The better approach is to treat this as a part of your overall portfolio. Your outside investments might include a spouse's retirement plan, various IRAs, old 401(k) accounts left at former employers, taxable accounts, various individual stocks and bonds, and other investments such as rental property. The point is to view your 401(k) account in light your overall portfolio and allocate your holdings accordingly.

 [See 6 Ways to Insulate Your Portfolio From Shocks.]

Don't ignore your 401(k). There were many stories during 2008-2009 about 401(k) participants who couldn't bear to open their account statements. Part of the reason that the participants who stuck with their plan did so much better in the Fidelity study was due to the fact that they bought shares at lower prices during the market decline and then benefited from the ensuing rally that started in March of 2009. As painful as it is, review your account at regular intervals and rebalance when holdings fall outside the target allocation range you have set. Even better, if your plan offers automatic rebalancing, take advantage of it.

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Use target-date funds with caution. The concept is great: Invest in the target-date fund with a target date close to your projected retirement date. The manager adjusts the level of stocks as you get closer to the target date. Additionally, participants get professional management of their investments. The reality is that different funds from different families with the same target date can often have widely different allocations and levels of investment risk. Also, the quality of the underlying funds differs among various fund families. If this route seems attractive to you, it is vital that you review the target-date funds offered by your plan. Don't default to the fund with the target date closest to your projected retirement, rather look at the allocation of the various funds in the series and pick the one that best fits your situation. Also look "under the hood." What are the funds's underlying investments.

Your 401(k) can be a great retirement vehicle for you. Like any other investment, it does take work to ensure that your savings are working hard for your retirement.

Roger WohlnerCFP®, is a fee-only financial adviser at Asset Strategy Consultants based in Arlington Heights, Ill. where he provides advice to individual clients, retirement plan sponsors, foundations, and endowments. He recently cofounded Retirement Fiduciary Advisors to provide direct investment and retirement planning advice to 401(k) plan participants. Follow Roger on Twitter and LinkedIn. Roger also blogs at Chicago Financial Planner.