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The past few months have certainly been rocky for 401k investors. And while the rollercoaster ride may not be over, the stock market appears to be showing signs of improvement. So what should you do now that the comeback is underway? And what do you need to do to make sure your business' plan is operating in good conscience?
WHAT YOU CAN DO
Doug Bambeck, an investment advisor representative with Investment Partners, LTD, shares some tips to help you manage your personal retirement plan.
1. Don't make long-term decisions with short-term news. It's important to have a plan and stick to it. The people who took their money out of the market in February missed the return that has happened since then. Others who stayed with their long-term plan have seen many of their investments come back.
2. Keep contributing. Adding to the principle investment helps your plan grow exponentially. And you can find some deals in the marketplace when stock prices are lower.
3. Don't be afraid to prefund. Many took advantage of the down market by making contributions to their plans early in the year to purchase more stocks for their money. By accelerating the timing of their contributions, they have more quickly recovered their lost funds.
4. Know your risk tolerance. The past year showed many people that they might not be as brave as they thought. Think long and hard to determine how much risk you will accept, and match your 401k allocation to your risk tolerance. High-risk, high-yield tactics are not for everyone.
5. When you approach retirement, keep thinking long-term. You don't need all of your money at once - your retirement plan should last about 30 years. While you need to keep a portion of it in conservative funds, keep up with inflation and manage your investments so they continue to pursue growth and meet your needs.
6. Don't chase investment returns. It's easy to get caught up in funds with a great track record, but you really can't invest based on past performances. The funds that performed the best last year may not do well this year. Stick to your long-term goals and remember your risk tolerance. If you don't know how you want to invest, a plan based on age and today's lifestyle may be your best bet.
7. Money market funds may actually lose money. Although money market funds are often considered one of the safest investments, they can actually lose money for your plan. Some money market plans aren't paying any interest, and while you may think you aren't losing money because you're not tied to a volatile stock, you are, essentially, if expenses are taken out of the fund.
And let's consider the possibility of inflation at, say, 2 to 3 percent. You have really lost the buying power of every dollar in your 401k, especially if you keep the balance in a money market fund that's not earning any interest. Money market and other capital preservation funds are neither insured nor guaranteed by the U.S. Government or the FDIC, and there is no assurance that a $ 1.00 share price or book value will be maintained. Be sure to read each fund's prospectus or offering statement before making any investment decisions.
WHAT YOUR BUSINESS CAN DO
Summer is a great time to review your company's retirement plan. Since most plans have a calendar year term, you still have plenty of time to make any changes.
In addition to looking at fees and investment options and deciding whether the plan still meets your needs, you should implement the following best practices to help your company comply with current fiduciary requirements.
1. Name a fiduciary or fiduciaries for the plan. Every fiduciary must understand their obligations under ERISA and demonstrate loyalty to the plan, proceed with prudence, diversify investment options and act in accordance with plan terms.
2. Ensure plan fees are prudent and reasonable. Fiduciaries should understand what fees the plan pays, and assess whether they are reasonable. Fees that may be considered duplicative, excessive or unnecessary breach the fiduciary responsibility. These fees, which can be flat or based on a percentage of assets, can come in many forms, including transactional fees for withdrawals or loans, and general administrative or recordkeeping fees.
The investment funds also have underlying operating fees. If your pension program is affiliated with an insurance company, there may also be an associated "wrap-around" fee for its asset advisory services.
Fees don't necessarily need to be the lowest, but they must be reasonable and necessary. Proposed ERISA rules will require disclosing the fees that participants and you, as the plan sponsor, pay. Many fees are currently netted from earnings and difficult to identify, but you should be prepared to answer participant questions that may arise from future disclosure.
3. Review your plan's investment policy statement. Having a well-crafted investment policy statement (IPS) is essential. You must meet regularly with the plan's investment advisors to review the quality of funds in the plan and determine whether they meet performance benchmarks stated in the IPS. If not, funds should be removed or replaced.
4. Take minutes when meeting with your investment advisor. Quarterly or annual minutes will help document that you have fulfilled your fiduciary responsibility. Your investment advisor should be able to help get this process properly documented.
We all hope the economy turns around soon so we can return to business as usual. But in the meantime, continue to make smart, informed, proactive decisions so you can hit the ground running when the roller coaster comes to a halt.
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