Stop blaming the market and start looking at your strategy.
Your once shiny 401(k) account has lost its luster.
And you don't know what to do.
Many 401(k) investors, who for years were used to seeing their account balances rise effortlessly, were stunned when they received year-end statements showing losses. The average account lost 10 percent last year, said a survey by Cerulli Associates in Boston.
"Some called to see if there was a mistake," said Diane Gallagher with J.P. Morgan/American Century Retirement Plan Services in Kansas City, Mo.
Today, many investors are still unhappy with their 401(k) performance. Wall Street is responsible for much of the damage. But investors aren't blameless. Many continue to make basic mistakes.
For example, less than half of 401(k) investors reduce risks by spreading their holdings among more than one or two investments. Although the average 401(k) plan offers 11 investment options, 36 percent of plan participants allocate contributions to a single fund, said a recent survey by management consultant Hewitt Associates. An additional 19 percent dump money into only two funds.
That's not a savvy investment strategy for the many workers who rely entirely on a 401(k) for their retirements.
But you don't have to sit idly by as your savings decay. Here are seven ways to tidy up your 401(k):
Diversify so you don't have the same kinds of funds.
You think you've picked different kinds of funds for your 401(k). But when you stop to examine your holdings, you discover you've selected all growth funds.
It's easy to wind up in this situation. Most investors aren't really looking at what they're selecting, experts say. Instead, investors select the funds that have been performing the best. "That has been a disaster strategy for the past few years," said Mark Wilson, a certified financial planner and director of financial planning at Tarbox Equity Inc. in Newport Beach, Calif.
In pursuit of hot returns, a lot of 401(k) investors loaded up on funds that emphasized technology or large-cap companies. When those sectors fell, so did account balances.
Best advice: To get the best mix for your age and risk tolerance, you must read about the choices your 401(k) plan offers. It means going beyond merely the name of the fund, so you will understand what types of companies the fund invests in.
Don't load up on company stock.
Many companies offer to "match" your 401(k) contributions with company stock. But then the employee decides to buy company stock, too. Suddenly, the 401(k) is heavy on one company's stock.
Emotions and corporate loyalty often cloud an investor's judgment.
"Employees feel they know better than anyone else how the company will perform because they work for it," said Larry Beltramo, a certified financial planner with Regency Securities in Irvine, Calif.
But it's a false sense of security, and investors can easily wind up with the bulk of their money in one investment. This means there's no diversification and no protection when the company stock dives.
Best advice: Company stock should make up no more than 10 percent to 15 percent of your 401(k) holdings.
Throw out unrealistic expectations.
Forget about 20 percent returns. Ditto for returns in the mid-teens.
You're not going to come close. That's a tough adjustment for many 401(k) investors, who need to remember that this is an investment for the long run and not a few years. The market runup of the late 1990s was extraordinary.
"People need to lower their expectations," said Don Wilkinson of United Planners' Financial Services of America in Newport Beach, Calif.
Best advice: Keep your expectations realistic. Investors should plan with more typical historical returns in mind like 8 percent, Wilkinson said.
Boost your contributions.
About 97 percent of companies offer to match their employees' contributions, Hewitt Associates said. But of 150,000 workers surveyed by Hewitt, 59 percent of those eligible to get the company match didn't contribute up to the maximum match limit.
Best advice: Take advantage of the match. "Put as much as you can into your 401(k) before you do anything else. The more you save now, the more choices you'll have later," Wilson said.
Stop being too conservative.
Playing it risky with your retirement money is a bad idea. But equally damaging is a strategy that is overly conservative.
Some investors, spooked by large drops in their 401(k)s, decided to pull out of stocks completely. Instead, they've parked funds in fixed-income accounts.
Beltramo sees many young investors making this mistake.
Young investors have time on their side to ride market ups and downs. By pulling back from stocks completely, investors lose the opportunity to buy when stocks are low. Plus, these investors will never outpace inflation and accumulate enough money to retire on if they're counting on low-yielding money market accounts.
Best advice: Talk to a financial expert if you're nervous about the stock market. They can help you craft a portfolio from the funds in your plan that will fit your risk tolerance and provide growth.
Don't borrow unless it's important.
It's OK to tap your 401(k) for important stuff, like buying a home. But if it's just for buying fun stuff like that motorcycle or nifty trip overseas, forget it.
Best advice: Think carefully before tapping your 401(k). If you decide to borrow, try to continue making the same monthly contributions on top of your loan payment.