Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: SUNDAY, May 21, 1995 TAG: 9505200008
SECTION: BUSINESS PAGE: F3 EDITION: METRO
SOURCE: ANNETTE KONDO KNIGHT-RIDDER NEWSPAPER
DATELINE: LEXINGTON, KY. LENGTH: Long
Kentucky-based Lexmark matches 30 cents for every $1 that Lesshafft puts into the plan; the match is for contributions of up to 5 percent of his earnings. And his contributions are tax-deferred, giving him a break from the IRS at the end of the year.
A 401(k) retirement savings plan allows workers to invest a portion of their pre-tax earnings into a variety of investment funds. As an added incentive, most companies offer some type of match, sometimes even a dollar-for-dollar contribution.
Lesshafft is among the 26 million workers, from both small and large companies in the United States, who invest in a 401(k) or a 403(b), which is for tax-exempt organizations such as schools and colleges.
However, unlike traditional employee pension plans, the burden of making the right investment choices doesn't rest with a professional fund manager. Instead, the responsibility falls to each participant, who has to make the right picks for his or her own goals.
``This isn't like the ol' company plan,'' Lesshafft said. ``You don't just let your money sit there and not keep track of it. There's a lot of information and you just have to weigh that and take your best shot.''
If your company offers a 401(k), workers who sign up for it are taking part in a ``defined contribution plan.'' In other words, it is up to the employee to ``define,'' or choose, how much to sock away.
Most companies have an annual limit on how much workers can invest in the plan, and the Internal Revenue Service also limits 1995 pre-tax contributions to $9,240.
Chances are, even if you are years - possibly decades - from your ``golden years,'' you probably need to give your 401(k) a checkup exam and possibly take on more risk to gain better returns, employee benefits experts say.
You might find you also need to increase your contribution to take maximum advantage of your employer's match, the benefit of compounding and lower taxes, because your taxable income is reduced by your 401(k) contributions.
First step: Sign up.
Many employees fail to take the most critical step: signing up for the 401(k), which is usually deducted directly from your paycheck.
Experts say scores of workers, many in their 20s, are losing out on one of the best investment deals around.
``Sometimes the problem with younger people is they can't be convinced they will retire,'' said Christine Seltz of Hewitt Associates, a benefits consulting firm in Lincolnshire, Ill. ``It's better to invest something, instead of nothing - even if it's comparable to a pizza a week.''
According to Labor Department and private studies, 25 to 35 percent of employees who have a 401(k) plan at their company are not taking part in it
Even if you think you can't afford to dip too deeply into your paycheck, the most critical mistake with 401(k) plans is not starting early enough, says David Godofsky, a principal with the benefits consulting firm of Bryan Pendleton Swats & McAllister in Nashville.
``People think it will be easier to start investing after the loans are paid, the mortgage is paid and the kids are off to school,'' he said. ``But the sooner you start, the easier it will be.''
The second most common mistake employees make with their 401(k) plans is not being aggressive enough to seek high returns. Yes, that means the dreaded ``r'' word - risk. But experts are quick to point out that in the long run, nothing performs like equities: small and large company stock funds, and foreign stock and bond funds.
These type of investments are riskier, but Godofsky notes that historically, rates of return for stocks are 11 percent, 7 percent for bonds and 4 percent for money markets. And that's not taking inflation into consideration, which can drop those returns even further.
Experts also point out that employees who are many years away from retiring can afford to ride out the market swings and volatility of riskier funds to reap the higher returns over the long term.
Although in recent years workers have been urged to safeguard their holdings by diversifying - divvying up 401(k) contributions into several different funds - employees often still end up with overly conservative investments because they shy away from the riskier funds that produce the greatest returns.
``There has been a lot of focus on diversifying risk'' among funds, said Carolyn Pemberton, spokeswoman for the Employee Benefits Research Institute in Washington, D.C. ``But we're finding they are fighting inflation, too. Their investments are safe, but that's not enough to beat the rate of inflation.''
Godofsky said he still sees anywhere from 10 percent to 30 percent of 401(k) participants at a typical company plunking down all of their contributions into a money market fund. ``That's just investing too conservatively,'' he said.
Another way to err on the side of conservatism is not contributing as much as you can afford into the plan. It's no time to pinch pennies if you are three to four decades from retiring.
Even if you have a good handle on your company's 401(k) plan, recent Labor Department guidelines are prompting more companies to offer a greater variety of funds and additional education efforts to help workers make better investment decisions.
But this isn't just a case of company altruism.
The January 1994 Labor Department guidelines will, in effect, reduce the fiduciary responsibility of employers. Quite simply, if a company provides a good mix of funds and enough education (but not advice, which would constitute a fiduciary responsibility), the employer is more likely to get off the liability hook if an employee makes bad investment choices.
by CNB