The 5 Step 401k Makeover

Perhaps the title of my post is misleading, because I am really referring to all retirement plans from 401k through IRA. After the massive declines in investment holdings last fall and early on into this year, I am offering five review steps for all retirement plans right now...

Asset Allocation
Saving has been the best feature of self-funded retirement plans. Most plan participants have been socking away money with regularity. It is this discipline that has served participants well in the past. Choosing the underlying investments, and revisiting that asset allocation has been the biggest problem for these plans. IRAs aside, most company plans do not allow a financial advisor to directly manage your plan for you. Enlist an advisor to regularly help in reallocated your investment choices. Your advisor can be your advocate in investments they are managing, as well as those they cannot.

Do you have a plan?
Adjusting financial plans has dominated my time with clients throughout the first and second quarter. Plan assumptions have changed in the last 12-18 months. Revisiting financial plans and making the numerical and mathematical adjustments is important for clients, in that they understand where they are in terms of reaching their retirement and other financial goals.

Have you budgeted your risk?
Investor's risk comfort has been redefined in this crisis. When people lose upwards of 30% of their retirement assets, it is back to the drawing board with understanding the risk/reward gamble. Balancing an investment risk where there may be an opportunity is the key. Having a system for budgeting risk in your investment porfolio is important. A methodology for striking the right risk balance can help in retirement planning.

Fees vs. Value
Now more than ever people are examining the fees they are paying for service versus the value received. Sometimes company plans can be laden with administrative fees. Knowing exactly what those fees are is important to the participant. It is also yet another reason to take control of old company plans that you are no longer participating in.

Do you have a guaranteed income stream in retirement?
While the place of the traditional pension in the overall retirement plan is a shrinking one. after the last year, many investors are rushing to guarantees for at least a portion of their retirement savings. Annuities can be highly complex plans, and investors should understand exactly what they are getting for the price they are paying. Newer guaranteed income plans allow investors to turn their asset into a stream of income without necessarily losing control of it completely. Be sure to understand all of the details before comitting to one of these contracts.

Bubble to Bubble: the culture of now

I believe that the excesses of the financial crisis our economy faced last autumn and earlier this year can be traced back to the returns that investors began to expect during the "dot-com boom." During this time, people could throw a dart at a list of technology companies and get a double-digit return.

I am certainly exaggerating, but the point is that returns were not in line with financial data. Additional, these astronomical returns fed into the frenzy over one sector of the economy. When reality set in in the early part of this decade, investors looked for the "next big thing," fueling a shift in "irrational exuberance" from tech to real estate. The danger in this was/is the leverage involved. Lenders wrote bad loans. Wall Street itched to get involved, thus the securitization of these sub-prime loans, passing along derivitives to investors--instead of reducing risk, this actually exacerbated the risk.

Inordinate performance is simply unsustainable. Investing is not a sexy business, especially if investors stay true to their risk tolerance and general appetite for risk. Our culture of immediate performance does not align with a steady investment return. Patience and discipline are the basis of sound investment decisions.