What the hey is happening with my 401(k) and what should I do about it? That's one of the many questions we've been asking as the financial crisis has unfolded and we've watched our retirement savings through employee-sponsored plans shrink. Here are four things you should do (and not do) with your 401(k) plan.
1.) Don't stop contributing to your 401(k). Money may be tight, but deciding not to contribute to your 401(k) plan will only lead to lost savings. You never know what the market will do day to day and if you miss out on a day of good news -- a significant uptick in the market -- then you will miss out on savings. If your employer matches any of your 401(k), then you will definitely be missing out on additional savings. As this Kiplinger article notes, you're in it for the long haul: "...even people in their 50s, 60s and 70s shouldn't worry too much. You won't need all your savings immediately, and because retirement can be a 30-year prospect these days, your investments have time to rebound." CNNMoney's Gerri Willis says you should stop your contributions only if you are in real financial trouble and have no other sources of cash.
2.) Do review your plan's asset allocation. The younger you are, the more invested in stocks your retirement plan portfolio should be. But even if you're just starting out and are invested almost entirely in stocks, those stocks should be diversified. Make sure there is a healthy mix of funds that invest in stocks of large, small, domestic and international companies, as well as growth stocks and value stocks. Kiplinger has many retirement-savings tools, such as this quiz to test your risk tolerance and this advice for building a sound retirement portfolio.
3.) Do get advice. Start with your company's 401(k) plan administrator. Kiplinger notes a recent Charles Schwab survey found that 401(k) investors who used some type of plan-offered advice earned annual returns about 3-percent higher than those who went it alone.
4.) Don't raid your 401(k). Avoid this if possible. You can access your retirement funds for a "hardship withdrawal," but it should be your last, last option. Not only will you not have savings for later in life, you'll pay dearly in penalties, fees and taxes to get at it. If you are younger than 59 1/2 years old when you tap into the funds, you'll pay a 10 percent penalty in addition to income taxes on the withdrawn funds -- easily about 40 percent of your withdrawal will go back to the government. Taking out a loan against your 401(k) plan is sometimes a possibility, though if you are laid off, fired or quit, you'll have to pay it back immediately. Either way, tapping into your 401(k) before retirement should be the last thing you do in hard times.