Making the Most of Your 401(k) Plan 

By Doug Charney

Everything in life involves risk and investing for retirement is certainly no exception.  Knowing how much risk you're comfortable with can go a long way in preventing sleepless nights and uncertainty during volatile markets.

Pay off high-cost debt: Let's say you're carrying $ 1,000 of debt on a credit card that charges 1.5% a month on the outstanding balance.  Meanwhile, you get a $ 1,000 bonus.  Should you use that bonus to pay off the credit card, or to invest in the 401(k)?

     Pay off the credit card first.  If you let that debt accumulate at 1.5% a month, at the end of a year it's $1,195.62 - for an effective rate of return (to the lender!) of 19.562%.  Leaving it there for an additional year raises the debt to $1,429.50.  And the interest is not deductible - you pay it with after tax dollars.  Not even a good 401(k) with a generous company match will keep up with that for long. Once you're not carrying high-cost debt, you're ready to invest in your 401(k).

Be comfortable with your 401(k) investments: Selecting the right investments should be done with care and understanding.  To make smart choices, be sure to ask questions about the mutual funds available in your 401(k) plan.

Your retirement funds should be viewed as long-term investments, and capital growth is an important ingredient for long-term investment success.  However, one year's outstanding results for a particular mutual fund may not be repeated the next year.  So you'll need to make your selections with a view to consistent long-term performance.

For each mutual fund you're considering, read the prospectus carefully.  While many prospectuses can appear forbidding, they contain a wealth of information about one-, three-, five-, and ten-year performance.  Make sure the portfolio managers who achieved good, past performance, are still there.

There's a time and place to invest at each level of risk: Investment risk should be evaluated with an eye on the amount of time you have before you plan to retire.  As a rule of thumb, if you're more than ten years from retirement, the percentage of non-stock investments in your portfolio should be about half of your age.  For example, if you're in your twenties, a portfolio with about 90% equities and 10% cash and bonds is likely to provide the right combination of growth and safety.

As you get older, you need to have less of your money in stocks.  In your 50s, for example, you may want to raise your non-stock proportion to 25%.  And once you're within ten years of retirement, you may want to raise the non-stock proportion faster.  However, over time stocks do outperform bonds, so some of your money should always be in stocks to provide the potential for capital growth and protect your portfolio from erosion by inflation.

Diversify among risk categories: Most 401(k) retirement plans offer a variety of mutual-fund choices (each of which is itself diversified over a broad range of securities) offering different investment objectives and styles.  You can adjust your portfolio by investing portions of your retirement dollars in various funds.  Using several different types of funds adds an extra dimension of safety to the diversification of the funds themselves.  For example, if you're just starting out in your career, you might invest 60% of your assets in an aggressive growth fund, 20% in a balanced fund (one that invests in both stocks and bonds), 10% in a global fund, and 10% in a bond fund.

Review your portfolio and risk tolerance every year or so: As your circumstances change, your goals will change too.  And even if your goals remain the same from one year to the next, you'll need to make sure your portfolio is moving in the right direction.

Much can be learned from reading the annual and semi-annual reports of the mutual funds you've chosen for your plan.  These reports typically show the specific companies, by industry group, in which the mutual fund is invested - as well as performance figures and information about the fund managers' strategy for the future.  Maintain files of your quarterly retirement-plan statements.  This will help you see how your account is performing over time and make adjustments as needed.

If you like, you can also track daily results by checking the net asset value (NAV) of each of your mutual funds in your local newspaper or financial periodicals like The Wall Street Journal.

Remember the key things to consider in order to effectively manage your investment risk:

·        Ask questions about the mutual funds available to you.

·        Read the prospectuses and company reports.

·        Establish a balance between stocks and other investments that gives you a good blend of growth potential and safety.

·        Adjust your balance among investments, as you get closer to retirement.

·        Don't expect last year's performance by any fund to be matched next year.

·        Check your mutual funds each year to make sure they're moving toward your goals.

·        Take an active interest in managing your retirement plan.  It's your money. 

This information is provided courtesy of Doug Charney, Vice President/Investments with Wachovia Securities in Harrisburg, PA. For more information, call Doug Charney at 888-529-2974, e-mail him at dcharney@wachoviasec.com, or visit www.charney.wbsec.com.