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Don't bail out on your 401(k)
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December 3, 2001: 11:29 a.m. ET
Scared by a second year of 401(k) losses? Experts say you should be investing even more.
By Meghan Collins
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NEW YORK (CNN/Money) - With 401(k) plans poised to lose money for the second year in a row, stock prices struggling and an economy caught in a recession, retirement investors might be tempted to take drastic steps.
They may want to jump into bonds or bail out of the markets altogether. They may stop contributing, or they may be too afraid to open their statements and rebalance their portfolios.
But the most important thing they should be doing is contributing even more, experts say.
"Don't even think about cashing out. Stay the course," said David Caruso, a certified financial planner and co-author of Let's Talk Money. "People are playing a dangerous game right now. This is the time to be putting money in."
Surviving 401(k) losses
The 401(k) is one of the best retirement investing tools because it lets workers contribute pre-tax dollars and lower their taxable income. The money grows tax-deferred and in many cases an employer will match contributions. Many companies typically match contributions 50 cents on the dollar up to 6 percent, for a total of 3 percent of an employee's salary.
Moreover, the new tax law approved in June will increase the maximum savings limits to $15,000 from $10,500 by 2006.
The law also offers catch-up provisions for workers 50 and older. Starting in 2002, if you're 50 or older, you may contribute an additional $1,000 above your maximum allowable 401(k) contribution. The catch-up amount will increase gradually to an extra $5,000 a year by 2006.
A lot of retirement investors were shocked when a study by Boston fund researcher Cerulli Associates showed that 401(k)s lost money for the first time in their 20-year history in 2000. The firm found that the average 401(k) account shrank to an estimated $41,919 last year from $46,740 in 1999. Cerulli analysts think the trend will probably continue this year, though they don't have any figures yet.
But financial planners say now is the perfect time for retirement investors - you can save more thanks to the new tax law and find a lot of stocks trading at bargain-basement prices.
And even though this is one of the worst years on record for mutual funds, it also means they won't have any capital gains distributions, making it a good time for new investors to jump in.
What should you do?
Bud Kasper, a certified financial planner from Kansas City, Mo., said investors should always put as much as they can in their 401(k)s, regardless of how the market and the economy are doing.
Financial pros say you should at least invest enough to get the company match. Otherwise, you're passing up free money.
You should have a diversified portfolio in your 401(k), with your money spread between small, medium and large stock funds that are both growth and value investments. Growth stocks have rapidly-rising earnings, while value companies are cyclical and often pay dividends.
Your weighting in bonds will depend on how long you have until retirement and how much risk you're willing to take. An investor in his 20s might have only 10 percent in bonds, or none at all. An investor in his 40s might have 30 percent to 40 percent in bonds.
Younger investors might also want to put more of their money in growth stocks, for a mix of 60 percent growth, 40 percent value, Caruso said.
"Fear is a much bigger motivator than greed, but you've got to save money and put it in stocks," Caruso said. "It's like a diet - to lose weight you have to eat less and exercise."
But Kasper thinks value stocks will continue to perform well. He suggests a value tilt for people getting closer to retirement.
For those nearing retirement, put five years' worth of income in a liquid investment like a money market account, Caruso said. Keep the rest of your money in your 401(k) and keep contributing.
In that way, you can still take advantage of tax-deferred savings but your immediate financial well-being won't be tied to volatility in the market.
Most investors are staying put
Finally, if you're thinking you're the only one in the life boat and that other retirement investors are bailing out, think again. New figures show that most retirement investors are staying put - and keeping their money in the market.
The average account balance of 401(k) investors stayed virtually unchanged from 1999 to 2000, dipping just 0.1 percent, according to a study by the Employee Benefit Research Institute, a non-profit research group based in Washington, D.C. The change in account balances includes activities like contributions, investment returns, withdrawals and loans.
The EBRI study found that investors did not make significant changes to their plans in 2000 despite the volatile market and negative equity investment returns.
"We are basically finding people are staying put," said Danny Devine, an EBRI spokesman. "The concepts of long-term horizon and long-term investing work well now." 
* Disclaimer
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