| Sargent & Lundy Savings Investment Plan |
| TIME TO QUESTIONS YOUR 401(k) ASSUMPTIONS? |
| The following excerpts are from an article in the Wednesday,
November 11, 1998 "Wall Street Journal". The opinions of the
author, Lynn Asinof, may or may not reflect those of the SIP Committee.
The stock market's wild ride this year poked holes in many people's assumptions. One of the biggest is in the assumption that they will be able to fund retirement with annual returns of 25% or more. With many employees now making critical decisions about retirement funding as part of their annual company benefits enrollment period, it is a good time to look at those holes and rethink some of the basic planning. At some companies, decisions about how much to put into your 401(k) retirement plan must be made now, along with choices for health-care plans and funding of flexible-spending accounts for such things as child- care and medical expenses. Other companies allow 401(k) decisions throughout the year. Either way, sitting down to review these decisions as a package can be important. The once-a-year checkup at benefits time can give employees a good picture of their overall financial health. If changes are necessary, it can help people overcome the inertia that often plagues decision making in such areas as retirement planning. "Many people are comfortable not stirring the pot because they assume the decision they made early on was a good one," says Judith W. Lau, a Wilmington, Del., investment adviser. "But that is not necessarily true." Things may have changed, she says, and not just because of the stock market. Companies may be offering new 401(k) fund options, a new baby or college tuition may have changed the financial picture, or there may be attractive retirement options now available outside the company 401(k) plan. A good place to start with 401(k) planning is the annual contribution level. Employees with 401(k) plans can tuck away a percentage of their pretax salary, commonly as much as 15%, to an annual maximum of $10,000 in 1999. While your past 401(k) contributions may have seemed ample, that level may no longer be enough, given the expectation that stock-market returns may be closer to the historical average of 10%. "Based on lower returns, perhaps they should consider increased contribution levels," says Ted Benna, president of the 401(k) Association, Cross Fork, Pa. Areas that are now competing for that 401(k) dollar include the Roth Individual Retirement Account and even some of the flexible spending programs that now allow employees to use pretax dollars to pay for long-term care insurance as well as child-care and medical care. Having figured out how much to invest in their 401(k) next year, employees must then decide where to invest it. The market's recent volatility, however, can make that decision seem paralyzing. If so, it's time to sit down and review risk tolerance, deciding how much stock-market exposure is acceptable. Some advisers, for example, are scaling back their allocation in the stock market and increasing bonds to reduce risk. Ronald W. Roge, a Bohemia, N.Y., financial adviser, says he has increased his suggested helping of bonds by five percentage points. That means someone whose asset allocation had been 60% in stocks would cut back to 55% in the stock market, adding the difference to bonds. Recent changes in the market may also mean that your current portfolio is out of whack with your allocation, making it time to rebalance. Someone who was 60% in stocks in July may now find that stocks account for only 50% of their portfolio. That may mean it's time to buy. When rebalancing, remember that your 401(k) is only part of your total portfolio. Indeed, you can use your 401(k) to offset positions in investments outside your retirement accounts. That can make good tax sense, too, says Karen Spero, a Cleveland financial adviser. If you want to reduce your exposure to stocks, for example, you can sell within your 401(k) without paying any taxes on the gains. That's because no income tax is owed on this money until it is withdrawn. Rebalancing also means taking a look at the diversification of your portfolio. The idea is to reduce risk by spreading money to a range of investments with different objectives. Then if international stock funds take a hit, for example, large-capitalization growth-stock funds may still be strong and vice versa. Doing some basic research may help people chose between funds with the same general objective, Ms. Spero says. It is important to look at the underlying fund portfolio, not just the objective listed on the prospectus. That is also where you will see any shifts in investment strategy. Look at expense ratios to find out how much it costs just to own that fund. Then check on the manager's performance relative to his peers. |
This page updated on 11/16/98