401k Advice and Bad Timing

When it comes to 401k advice, timing may not be everything, but it is certainly important.

A recent report from Greenwich Associates brings to light just how important timing can be. After years of efforts to move workers away from ultra-conservative money market investments and into investment options having a longer-term investment horizon, what happens? Markets fall off the table!

The result is a credibility gap with many rank-and-file participants feeling burned and plan sponsors searching for ways to fix the damage. The Greenwich report likens the situation to a “bad Greek trgedy” and points out that for many plans, implementation of well-intended initiatives like automatic enrollment and target date investments, occurred literally “on the eve of the biggest market collapse in 70 years.”

From 2007 to 2008, the share of plan sponsors using money market or stable value funds as their default investment option dropped to just 19% from 35%, while the share of plans using target retirement date funds jumped from 35% to 53%. It is not uncommon for these funds’ equity exposures to reach 50% or higher.
Plan sponsors’ successes with automatic enrollment and new default investment options place them in an awkward situation at the start of 2009. While everyone invested in financial markets experienced the pain of systemic failure last year, 401(k) participants are feeling particularly hard hit because the money in these plans often represents a large share of their personal holdings and, in some cases, the entirety of their retirement savings. “Furthermore,” notes Chris McNickle, “many of these employees began investing not of their own individual initiative, but rather as a matter of corporate policy.”

Virtually all 401k participants are feeling the pain of market losses. If you are an investor who moved from “safe” investments to the stocks just in time to see the market fall, you may be feeling even more pain. But regardless of your circumstances, there are plenty of good reasons to “stay the course”. Here are a few:

• Remember the match! If you’re lucky enough to have a 401k that features an employer matching contribution, bear in mind that even with the market falloff, you are still likely ahead. For example, a dollar-for-dollar match equates to an immediate 100% return on your money. Remembering this can help soften the psychological blow of big investment losses.

Employee Funds	$100
Employer Match	$100
TOTAL	$200
After 30% Loss	$140

• Remember the tax break! Your 401k contributions are made with pre-tax dollars – the same $100 you contribute to a 401k gets you only $85 in additional pay (likely less) if you chose not to participate in the 401k (assuming you’re in the 15% tax bracket). Another psychological cushion.
• Focus on “shares” instead of dollars. The money you set aside in your 401k is likely invested in a mutual fund or similar vehicle that prices net asset share values at the end of each business day. It may be some consolation to know that your fixed dollar contribution is buying more shares at today’s depressed prices and this will payoff when the market revives and share values are on the rise again.
• Opportunity of a lifetime? The worst thing a 401k investor can do is abandon their stock investments at the market bottom. Yet this is exactly what many frightened investors do. Instead, try to think of the market upheaval as a once in lifetime opportunity to buy in low. Younger 401k investors, especially, need to recognize the opportunity before them.