Should You Stay With Your 401k?
Thursday, December 11, 2008PAUL KANGAS: It looks like senior citizens will get a break on rules requiring them to take money out of their IRA and 401(k) plans, but it won't come until next year. The House and Senate have passed a measure freezing those required distributions in 2009. The president is expected to sign it. The big question now, what happens for this year? Many Americans age 70 1/2 and over have seen their retirement funds torched in the market meltdown. They're required to take money out based on the value of their accounts at the beginning not the end of this year. But our tax guru, Kevin McCormally of Kiplinger's, thinks the Treasury may still change its rules sometime in the next few days. He suggests you wait a week or so to see what happens. We'll tell you when and if, the Treasury makes those changes.
JEFF YASTINE: If you're saving for retirement with a 401(k) account, early next year you'll get your next statement in the mail and it's almost a sure bet that it will be ugly. This year's frightening sell-off in stocks has wiped out billions of dollars in retirement savings. But as Suzanne Pratt reports, experts say you need to fight the temptation to bail out of your account.
SUZANNE PRATT, NIGHTLY BUSINESS REPORT CORRESPONDENT: You've probably heard the not so funny joke about your 401(k). It's been reduced to a 201(k) -- half of what it was worth a year ago. Given this year's stock market rout, that's sad but true for many plan participants. The diminished value of 401(k)s has caused some investors to consider halting contributions. Others even wonder if they should take the money out despite the penalties. Vanguard 401(k) expert Ann Combs says doing either is a bad idea.
ANN COMBS, HEAD, RETIREMENT CONSULTING GRP., VANGUARD: We really urge our clients to take a long-term perspective and to stay the course. Retirement investing is a long-term prospect. We think it's very important that you continue to contribute to your plan.
PRATT: Most data only show what participants have done through October, which is to stick with their 401(k)s. Hewitt Associates, which administers 401(k) plans for companies, says just 4 percent of participants have quit making contributions. That's only a bit more than the 3 percent from last year. Vanguard, one of the leaders in retirement planning, would only say the number of participants decreasing or discontinuing contributions was very low. Vanguard did say 15 percent have moved money into different funds this year, but that's the same number that made changes last year. Experts say most investors realize a savings account can't begin to compete with a 401(k).
COMBS: What you're giving up if you pull out of your 401(k) plan is the tax advantages that are associated with saving through a retirement plan and in many instances, most cases an employer matching contribution, which is free money you are leaving on the table.
PRATT: Beyond that free money, history gives us a good idea of how much could be lost if you said so long to your 401(k), particularly if the funds were in stocks. From 2000 to 2002, the S&P 500 plummeted nearly 50 percent. But investors who weathered that storm saw the stock market charge back, surging nearly 90 percent from 2003 to the end of last year. Financial advisor Michelle Price reminds her clients that their 401(k)'s, when invested in stock funds, offer one of the best tools for accruing wealth.
MICHELLE PRICE, FINANCIAL ADVISOR, EDWARD JONES: If you have a goal, a retirement savings goal, probably one of the only ways you can get to it is if you're in the market, if you're earning enough over inflation in order to reach that goal and not lose purchasing power on your money.
PRATT: For investors who can't take the stock market heat, most 401(k)s offer asset choices beyond equities, including bonds and money market funds which are usually pretty safe. While those options may not allow you to retire early, they may help you sleep at night and still capture a 401(k)'s tax benefits and matched contributions. And here's a tidbit that may shock you: Smith Barney's 401(k) guru Rochelle Silverstrom says some participants should up their contributions now and put that money into stocks.
ROCHELLE SILVERSTROM, DIR., 401K SOLUTIONS, SMITH BARNEY: It's almost like investments are on sale. So for example, I know when I go to the grocery store and tuna fish is on sale, I buy more cans of tuna fish. I stock up on tuna fish. It's the same thing with a 401(k).
PRATT: Experts believe 401(k) plans will continue to be the primary retirement vehicle for most Americans. Not only do they offer great advantages, but there are few other options for sound retirement planning. Suzanne Pratt, NIGHTLY BUSINESS REPORT, New York.
