| Sargent & Lundy Savings Investment Plan |
| AVOID THESE MISTAKES |
| The following excerpts are from an article in the September
1997 issue of "Money" magazine. The opinions of the author, Susan
Kuhn, may or may not reflect those of the SIP Committee.
Getting the most out of your employer's 401(k) retirement savings plan seems simple enough in theory: Contribute the maximum you're allowed, choose your investments carefully, and keep your mitts off the money until you hit 59-1/2. Trouble is, it's easy to screw up in an employer-sponsored savings plan. "A 401(k) could well become your largest asset, but people mismanage that money for all sorts of reasons," says Dee Lee, president of Harvard Financial Educators, a consulting firm in Harvard, Mass. Some blunders, unfortunately, can't be easily repaired. What follows are common 401(k) mistakes and how to avoid making them: * Failing to maximize your company's match. You are, or course, contributing to the plan (right?). But are you getting all you can out of the boss' portion? Commonly, an employer will match 50% of an employee's contribution, up to 6% of salary. In other words, the most he'll kick in is 3% of your wages - and that's only if you put in the full 6% yourself. Salt away less, and so will he. * Not paying enough attention to the investment allocations in your 401(k) portfolio. The biggest headache for many plan participants is deciding where to invest their 401(k), since the choices are wider than ever. Too often, however, participants put too much money in one type of investment. The plans usually provide at least one choice that is expected to hold its value, such as a stable-value fund, which aims to preserve capital plus pay a stated rate of interest. In addition, many employees want a money-market account, where they can safely stash their contributions while deciding where to invest them. As a result, many 401(k)s with a variety of fixed-income funds have been slow to add stock funds. Alternatively, your 401(k) might be too heavily weighted in your own company's stock. According to Frank Bermani, executive director of the Society of Plan Sponsors in Windsor, Conn., 45% of all 401(k)s now offer company stock as an investment option, and some employers match contributions exclusively with that stock. Moreover, some employers restrict participants from shifting the money out of their company stock and into another 401(k) offering. As we explained in our August issue, it's unwise to have more than 20% of your retirement account in your own company's shares, since you are already dependent on your employer for your job, your health benefits and possibly a pension. Finally, companies are increasingly funneling employees' profit-sharing bonuses into their 401(k) accounts. If yours does, be sure you don't blithely assume that this money will automatically be allocated in the same fashion as your regular 401(k) contributions. So if you expect to get a profit-sharing bonus for 1997 and aren't sure how it will be invested, check with your benefits consultant. * Turning into a stock jockey. Some 401(k) participants become so obsessed with the idea of riding winners that they shift in and out of stock funds, trying to time every dip in the market. They can get away with it because there are no immediate tax consequences for moving money around inside a plan and no sales charges for switching. But stock jockeys can pay a huge performance penalty. While the average U.S. stock fund returned 14.5% annually from 1984 through 1996, the typical fund investor earned just 6.1% a year because he got in too late, pulled out too soon or both, according to Dalbar, a financial services research firm in Boston. * Using your 401(k) as a quickie loan window. Access Research, a 401(k) consulting firm in Windsor, Conn., reports that 78% of plans let employees borrow some of their accumulated assets and, as of 1996, 23% of employees had loans outstanding. On the surface, 401(k) loans are a sweet deal because you pay yourself back at an interest rate slightly above prime, which is 8.5% today. By contrast, you'd pay about 15.4% for an unsecured personal loan at a bank. But borrowing from your plan has an unfortunate domino effect on your portfolio. Not only are you removing money whose sheltered earnings could be compounding, your loan's interest rate is likely to be lower than the portfolio's return. As a result, you can drag down your 401(k)'s overall performance. So before you borrow from your 401(k), ask yourself: Will the money I receive be used to fund a future goal as important as my retirement? If the answer is no, borrow somewhere else. |
This page updated on 10/27/97