How to Protect Your 401k Investments
The 401k account is a staple of the average American employee's retirement plan, as it is offered more often than a defined benefit traditional pension. Many people save in their 401k for 40 or more years. During that time, much can happen with financial markets, and an investor's 401k account will certainly see its share of ups and downs. Since this account will probably represent a significant amount of a retiree's nest egg, it is important that the investor make every effort to protect this 401k account so that it can grow into the future.
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Instructions
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Continue contributing to your 401k. Each month that passes that you do not contribute is a month lost, and an opportunity to invest in a tax-deferred investment that you will not have again. Also, by continuing to invest the same amount monthly, you are practicing dollar cost averaging, which is an excellent way to ride out the highs and lows of a volatile market.
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Check your 401k statements regularly. Most employers are honorable, and would never touch an employee's 401k or not deposit payroll-deducted investments on a timely basis. Even so, you should verify that the withheld amount for contribution is being added to your account. Most employers deposit the employee contribution quickly, but they are required to deposit these funds into the account by the 15th day of the month immediately after the month that the money was withheld. Employer-matched contributions may take longer to show up in the account, but watch for these as well.
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Design an investment plan and keep with it. You are the best person to determine your tolerance for risk. Stocks are some of the most volatile investments in a 401k, but also have the largest potential for gains. Keep your risks lower by investing in mutual funds. Examine the available funds and choose those that have the best track record over the longest possible time frame, preferably at least 10 years. Dividend-paying stocks are also a good bet, because even if the values drop, the stocks still can produce income with the yearly dividend payments.
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Get help with your 401k investments. Your employer may offer 401k advice or the company that it uses to provide the accounts may do this. A change in the law from 2006 makes it completely legal now for employers to offer investment advice on retirement accounts. A survey by investment firm Charles Schwab found that 401k investors who received investment help earned an average of 3 percent more on their investments than participants who go it alone, according to a 2008 article from "Kiplinger's."
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Assume a sufficient amount of risk. While you probably will not lose any principal by investing your 401k holdings in cash or fixed-rate options, inflation will erode the value of your account significantly into the future. Not keeping up with inflation by refusing to take sufficient risk is a very real risk to your future wealth.
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Tips & Warnings
Avoid 401k loans. If you leave employment and cannot repay the loan, it is treated as a withdrawal and you will owe taxes and a 10 percent penalty on the loan amount.
Do not cash out your 401k if you leave your employer. By doing this, you will pay taxes on the value of the account at your normal income tax rate, in addition to a 10 percent tax penalty. You will also lose the advantage of the time that you have been contributing to the account, and will have to start over. Roll the account to an IRA if you are not comfortable keeping it with your former employer.
