Don't Let Your 401(k) Become a 911

Financial advisors have 1,001 stories about people in their 50s waking up one day and finally deciding to take a look at their 401(k).

“It’s generally a major life event—a parent dies, the last child goes to college—and suddenly, people realize that retirement is around the corner,” says Tom Geraghty, a partner at Stonegate Wealth Management.

In your 20s, Geraghty says, “you probably don’t have a 401(k) because you need beer money.” Ages 35-50 have been referred to as the lost years because you get busy with life, kids and whatnot.

You probably put money into a 401(k) during the lost years, but few people have much time to pay much attention.

“An unbalanced 401(k) is like an unguided missile,” Geraghty says. “If you just keep dumping money in there and don’t check it, it can run amok because nobody’s steering it. You have no control over where it will land."

Compounding the problem is that financial advisors generally don’t bother to ask clients about their 401(k) because they don’t automatically collect a management fee like they do from a regular investment account.

The Basics

If this is your wake-up call, then pay attention.

Financial advisors almost unanimously agree: The biggest mistake people make with their 401(k) is not going back in and rebalancing it.

You should check on your 401(k) at least a few times a year. A good plan is to go in every quarter and move things around so you maintain your original asset allocation -- by selling the winners and buying the losers.

Rebalancing does two things, says Rob Jupille, president of RTJ Financial Management in Santa Monica, Calif. “First, it reduces the volatility of the portfolio (ask anybody who let their allocation get out of line in the late 1990's),” Jupille says. “Second, it actually increases overall return because you buy more low-priced stocks and less of the overvalued stocks.”

If your plan has an auto-rebalancing feature, use it. If not, then, regardless of your age, set up a schedule to go in and rebalance.

Another tried-and-true concept is dollar-cost averaging—the last year in the stocks has provided ample illustration. If common sense says you can't time the market, then keep those payroll deductions coming regardless of the market's highs and lows. Buying on the dips offsets some of the pain you may feel about the money you committed at the peak because it lowers your average share price.

“Dollar-cost averaging is a great way to invest no matter what you’re buying, but particularly so when you’re talking about asset categories that have enjoyed a strong performance run up like these,” says Christine Benz, director of personal finance for mutual-fund tracker Morningstar. “It reduces the odds that you’ll be buying at a high.”

And, if people have learned one thing from Enron and Bear Stearns

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One advisor suggested you have none of your 401(k) in your company's stock. Another said 25 percent. But most said either 5 percent or 10 percent should be the maximum. 

Conventional Wisdom vs. Brave New World

So much for the no-brainer arts. It's time to think outside the box.

Don’t make the mistake of thinking that, just because you’re older, you have to be more conservative.

That old wives’ tale about owning your age—in percent terms—in bonds? It’s not written in stone.

A better idea, says Barry Armstrong, a financial planner and host of “Money Matters” on WBIX 1060 in Boston, is to make sure that you have five years of income in something safe like a stable-value fund, capital-preservation fund, money market or Treasury bonds, and keep the rest of the money growing.

“Just because you’re 70 doesn’t mean you can afford to play it safe – you can’t!” Armstrong says. “You can’t get by on a 2- to 3-percent return.”

Don’t be afraid of volatile markets, says “You Can Afford to Retire” author Michael Kresh,  “While you’re accumulating money for your retirement, volatility is your friend.”

You should also to take into consideration how the world has changed.

“Your parents’ rules for retirement no longer apply,” says Randy Carver, president of Carver Financial Services in Mentor, Ohio. “Not only are people living longer but they’re spending more in retirement. That’s why you need to make sure it’s allocated to grow.”

Also, think about increasing the amount of international assets you’re holding.

“Fifteen years ago, the U.S. was 70 percent of the global market cap. Today it’s 28 percent and falling,” says Bruce Fenton, founder of Atlantic Financial in Norwell, Mass., who recommends blossoming markets such as India, China, Latin America and the Middle East.

Carver agrees, suggesting at least 20 percent of your long-term retirement savings be in international holdings.

Plus, there’s the issue of quality. “If your perfect mix is 60-40,” Geraghty says, “It may be 80-20 or 50-50 based on the quality of the funds offered by your 401(k) plan.”

If your 401(k) doesn’t offer a lot of fund options, you should consider contributing enough to get your employer’s maximum match and put the rest of your money in a separate retirement account with complimentary holdings that, when combined, meet your allocation goals.

If that seems overwhelming, then ask your financial advisor if he is willing to take on managing your 401(k) for an extra fee.

“If you don’t take care of yourself financially,” says the author of “This Is Not Your Parents'  Retirement," Patrick P. Astre. “you’re going to see your own personal misery index go through the roof."

(This story has been updated since it was first published April 25.)