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February 25, 2009


ATT00261These are extraordinary times for 401k participants.  Economics around the world are experiencing one of the most challenging and troubling time periods ever.  The market’s decline has been swift and dramatic.  What should you do with your 401k?  Should you continue making contributions? Where should you be investing those resources?   If you have been in equities, should you pull out now?

Emotions are running high.  History has shown that whether times are good or bad, emotions can drive individuals into making decisions that are detrimental to their long-term goals.  You do not want to follow the herd. Fear of loss is greater than the desire for gain.  That is one reason why drops in the market can be so dramatic.  Making decisions based on overconfidence, pride or fear is not the solution.

What should you do?  You, first, should continue making your 401k contributions.  Many 401k plans have an employer match.  If you cut your contribution, not only will you put less money in your 401k, so will your employer.  Also remember that the reason you are making these contributions in the first place, is to fund your retirement in later years.  If you still have that need or goal, continue making those contributions.  Lastly, your
contributions are made with pre-tax dollars and grow tax-deferred.

How you should invest your 401k fund will depend on a number of factors. These include: current age, age of retirement, risk attitudes, amount of funds available, etc.  There is no simple answer.  Spend some time with your financial advisor going over all these issues and more.  Together, you can build a 401k retirement investment strategy that is custom made for you.

If your 401k is invested in equities and you are wondering when the market will turn around, there is no way of knowing.  The study of past economic crises might provide some perspective.  History shows that there have been a number of striking declines and advances in the past.  Looking at every point where the market returned less than 2.5% over a ten-year period of time (now we are at a negative return), it then returned 13.3% per year over the next 10 years, with a range of return of 7.1% to 18.6%.  Of course,
historical results are not predictive of future returns.

There is an old saying that it is always darkest before the dawn.  This holds true to the equity market as well.  On June 1, 1932, the market was at its depression era low.  Three months later, the S&P 500 increased 18.73%. After one year, the S&P 500 median increase was 45.46%.  In April 1942, we were at war and we were losing.  The Pearl Harbor attack had crippled our Pacific fleet.  Germany had taken France, and inflation was rampant. Companies faced wage and price controls and excess profit taxes.  In that
same month, with no clear reason, the market hit bottom and started to rise. By the end of June 1943, the Dow Jones Industrial average had gained 54%.

Some 401k participants are taking “in-service rollovers” of 401k assets into their IRA, where they have greater investment opportunities.  Many do this to invest in annuity contracts issued by life insurance companies that provide a guaranteed rate of return.  A word of caution:  the guarantee is only as good as the company issuing it.  Additionally, there are other costs that may be involved.  Make sure to carefully review all costs and pertinent information before making any decisions.  Whether you are entitled to make
an “in-service rollover” depends on your plan document.

During these difficult times, it makes sense to have a complete review of your 401k.  Contact your Money Concepts financial advisor for help.