Advisers - Examining your 401(k) important in hard times

An allocation strategy is a must for investors of all ages.

By Tami Luhby ~ Newsday

No matter how much it hurts, experts say you must open your most recent 401(k) statement and see where you stand.

It may not make pretty reading with the value of some portfolios decimated as market indices touch five-year lows, but the time is right to make sure you stay on track to meet retirement goals.

Wall Street's slide of the past four months has thrown many retirement plans out of balance, leaving some with too much money in fixed-income investments and too little in stocks. The lower volatility of bonds and cash may be comforting at a time when the Dow Jones Industrial average is dropping, but an overabundance can greatly hurt your chances of having enough funds at retirement.

"This is the time to go back and see if you are still in line with your original asset allocation," said Trisha Brambley, president of Resources for Retirement, a 401(k) consulting firm.

The first thing to do in a turbulent market is to look at your allocation strategy -- or create one if you never got around to it. This plan takes into account your age, risk tolerance and retirement goals and determines how much you should have in stocks, bonds and cash. Then, you need to make sure you still have the proper amounts in these investments.

Of course, nowadays some people are rethinking how much risk they can handle and still sleep at night, said Keith Rauschenbach, vice president of consulting services at TIAA-CREF. While investors are worried, and many are calling their plan providers to voice their concerns, most end up sticking to their current strategy.

If you're weighing whether to make changes to your 401(k), here are general asset allocation guidelines from Financial Engines, a 401(k) advisory firm:

Younger employees who can tolerate more risk may put 70 percent of their 401(k) assets in large-cap equity funds, 15 percent in international and 15 percent in small-cap.

A portfolio with average risk, appropriate for those in their 40s, might have 10 percent in cash, 30 percent in bonds, 40 percent in large-cap equity funds, 10 percent in international and 10 percent in small- or mid-cap.

Those closer to retirement should reduce their risk by placing 45 percent in cash, 30 percent in bonds, 20 percent in large-cap equity funds and 5 percent in international.

A good way to shift your balances is to change future contributions, rather than existing assets, financial advisers say. While continuing to buy stock funds with double-digit negative returns might be tough, remember that you are now picking them up at bargain-basement prices, said Alan Kahn, president of AJK Financial Group in Syosset.

"The stock market is the only market where people don't like to buy things on sale," he said.

Unfortunately, experts say, most people don't monitor their 401(k)s closely enough though they should consider rebalancing once a year. A recent Hewitt Associates study found only 19.5 percent of active participants made a trade in 2001, despite the wide market swings, down from 30 percent in 2000.

While that shows people are not panicking, it also means they are not rebalancing, said Lori Lucas, a defined contribution consultant at Hewitt. "They are just overwhelmed by the current market environment, which is extremely challenging," she said.

The stock market tumble has soured Mary Kovach's view of retirement plans. The Long Island City, N.Y., resident has lost money in her 401(k), as well as about $400 of the $2,000 she placed in a Roth IRA last year.

While she doesn't intend to contribute to her IRA this year, she plans to keep placing 8 percent of her salary in her 401(k) and review her funds' performances.

Said Kovach, who is in her late 30s and works for an advertising agency, "I have to count on my 401(k) for retirement, but I don't think it will be enough."