|
 Undoubtedly, the market slide that began in December 2007 unveiled some series flaws in the way America saves for retirement. Millions of Americans watched their precious 401k retirement savings vanish, as did their hope for an early retirement.
In this article, we're going to talk about some of the serious problems participants in 401k plans face during economic downturns. We'll also talk about why this problem is a serious one for Americans as well as their companies. Finally, well explain some of the strategies that plan participants can adopt to deal with this dilemma.
401k Retirement
Undoubtedly, the 401k plan is one of the most innovative arrangements ever conceived of to help Americans achieve a financially secure retirement. These plans allow participants to save for retirement by depositing money into an investment account. Within certain limits, the funds are deposited on a pre-tax basis and the money is allowed to grow on a tax-deferred basis until withdrawn.
Even more enticing is the fact many companies encourage employees to participate in their company's 401k plan by matching contributions. In fact, four years after the introduction of the 401k plan, the US Department of Labor reported that there were over 17,000 companies offering 401k plans, and over 17.5 million participants.
By 2002, there were an estimated 423,000 plans in place, 43 million participants, and total assets estimated to be close to $2 trillion according to information published by the Employee Benefits Research Institute.
401k Plan Flaw
The success of the 401k plan in the late 1990s, as well as pressure to increase corporate earnings, resulted in the decline of traditional pension plans. According to information published by the Pension Benefit Guaranty Corporation, the number of pension plan participants stood at 16.2 million in 2005. That's a decrease of 27% since the 1988 high of 22.2 million participants.
One possible explanation for the decline in the number of pension plans offered by companies could be the replacement of pensions with 401k plans. On the one hand, this can be an tempting offer to the next generation of employees in America since today's plans allows them to have better control over their retirement destiny.
On the other hand, these employees now have their entire retirement nest egg at risk. And employees with a large number of years until retirement will frequently assume more risk in their 401k portfolio. This combination, along with a declining stock market brought a lot of attention to the flaw in thinking that employees could be successful acting as their own pension fund managers.
One measure of this problem is seen in the decline of mutual fund values. In the fourth quarter of 2008 alone, mutual funds lost nearly $600 billion in value. Major stock market indexes such as the S&P 500 also experienced significant setbacks that year, falling nearly 40%.
Following these broad market declines, all the flaws in the 401k pension system were exposed to participants as well as government regulators. Even more alarming was the reaction many investors had to the market decline in 2008 - selling stocks in a depressed market. By doing so, these investors locked-in losses that have cut deep into their retirement savings funds.
Recovering 401k Plans
Thankfully, there are strategies that 401k plan participants can adopt to fight back against these problems with the 401k system. Just keep in mind that even the highest-performing investment portfolio manager experiences setbacks from time to time - no one is perfect.
When trying to manage the downside of a 401k portfolio skid there are two important objectives:
- Minimize the 401k's potential for a decline
- Minimize the time for the portfolio to recover
The two best approaches at your disposal include:
Managing a 401k Plan
Taking on the responsibility of managing your retirement funds in a 401k portfolio is not a trivial matter. If all goes well, your 401k funds will be in excess of one million dollars before you retire. That's a lot of money to manage, and a 40% loss in funds could mean the difference between a comfortable retirement and a taking on a second career.
The best investor is an educated investor. You work hard to earn that money; you need to work equally hard to protect your investments. If your company offers personal finance workshops, then make sure you participate. Make sure you understand the fundamentals of stocks and bonds, including how to choose excellent stocks. Don't worry about not being able to understanding the theories, take that first step and start educating yourself.
The other important concept to understand is how to diversify your portfolio so any decline will be minimized and short-lived. Understand your risk profile, which is a measure of your tolerance for portfolio losses. And make sure that you don't have all your retirement eggs in one basket. This means avoiding placing more than 10 to 20% of your money in a single company, mutual fund, or industry.
Finally, don't panic when your portfolio experiences a loss. If you have a sound financial plan, and a diversified investment portfolio, then you're on solid ground. It's possible to survive a recession since they typically last only a couple of years - which is a relatively short timeframe if you have ten years or more before you need to touch your retirement funds.
About the Author - 401k Problems
Copyright © 2009 Money-Zine.com
Retirement Resources on the Web |
Home 
