Financial experts advise diversification in 401k plans

By Greg Phillips

Published: October 24, 2008

With the stock markets plummeting in recent months, many residents have seen their 401k retirement plans face similar downturns.

According to local financial experts, the key to avoiding losses and maintaining a secure 401k plan is simple: Diversify.

“The No. 1 option is you must diversify,” said Steven Evans, financial advisor at Cap South Partners in Dothan. “What hurts investors most is if they did not have a diversified mix of assets in 401k and they’re getting close to retirement. You’ve got to have a diversified mix of assets, rather than all in one asset class.
If you had diversified, you would limit your downside.”

A 401k, which is a tax-deferred savings vehicle offered by employers, allow employees to place a certain amount of each paycheck, before tax, into an account.

Normally, employees have options for investing the money, whether it is in bonds, stocks or other vehicles.

As with most financial decisions, it’s generally best to explore all the options when deciding upon 401k distribution.

“It’s never a good idea to have all your eggs in one basket,” said Mac R. Holmes, Ph.D., research professor of economics and business for Troy University.

The closer residents get to retirement, the more they should consider switching their assets from stocks to bonds.

“As you get older, most people should begin to move their 401k funds out of stocks and into bond funds, because it is less risky,” Holmes said. “They don’t move up and down so much with the stock market. The problem is, over a long period of time, stocks are going to beat them in terms of the rate of return to the investor. In a sense, you’re having to make a decision between choosing a less risky investment as opposed to one that is riskier but will give you higher returns over a long period of time.”

Stocks remain a good option, especially for those beginning their 401k plans, but the key remains spreading the wealth.

“Barring craziness by the politicians, the markets will come back, and there are going to be some large fortunes made by people who are buying right now,” Holmes said.

Evans also encourages those currently suffering losses in the market to stay committed, as long as their assets are spread out.

“We’re telling all our clients if you’re having trouble with the market, you should stay invested long term,” Evans said. “If you are concerned and want to reduce your risk level, add more bonds, add a cash position to your retirement. As people get more advanced in age, they need to be more conservative. If someone enrolls at 35, they often never change investments again. They should become more conservative as they get closer to retirement and switch to bonds, things like that.”

One thing the experts stress is the importance of retirement plans, including 401k plans. Just because the market is down now doesn’t mean 401k is a bad option.

“All of it’s good. Social Security, we don’t know how long it’ll be there,” Evans said. “401k allows the investor to get the opportunity to receive money from employers. Employers got away from pension plans, and this is the answer to the concerns about Social Security.”