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During the last several months, there has been increased stock market volatility in response to the upheaval in the housing and credit markets. Participants have become increasingly concerned about their retirement account balances.
The following questions and answers will help you focus on whether you should be taking any action at this time with respect to your retirement account.
Should I continue to make contributions to my employer’s
401(k) plan?
Yes. Regardless of how you invest your 401(k) plan benefits, you should continue to contribute to your employer’s plan. Many participants are concerned whether they are saving enough money for retirement. If you have this concern, you should continue putting money away for your retirement through your employer’s retirement plan. In addition, many employers make matching contributions based on a portion of a participant’s 401(k) contributions. If your employer makes a matching contribution, you should at least make enough contributions to receive the maximum employer match. Finally, you receive significant tax benefits when you make contributions to your employer’s plan. Because Traditional 401(k) contributions are made on a pre-tax basis, your contributions will decrease your current tax bill. Furthermore, the earnings on your 401(k) contributions will grow tax-deferred, meaning that you will not be taxed on your contributions and earnings until you withdraw funds from the plan.
My retirement account balance has decreased significantly in recent weeks. Should I sell all of my stock or bond fund holdings and invest 100% of my account in the plan’s cash equivalent fund?
Not necessarily. The answer to this question depends on your risk tolerance and your investment time horizon. Your “risk tolerance” is how well you can tolerate losses in your retirement account over a short period of time. Your “investment time horizon” is the period of time between now and when you will need to withdraw funds from your employer’s plan to pay for your retirement expenses.
You should think of the money you put into your 401(k) plan as a long-term investment. That said, you should give some thought to preserving the retirement assets you have already accumulated, especially the closer you get to retirement and use of the funds. Balancing the need to grow your retirement account over the long-term with a level of risk of loss and volatility that your are comfortable with over the short-term requires a careful consideration of the Asset Allocation model that is right for you.
Asset Allocation is an investment strategy that aims to balance risk and reward by apportioning a portfolio’s assets according to your goals, risk tolerance and investment horizon. The three main asset classes – stocks, bonds, and cash and equivalents – have different levels of risk and return, so each will behave differently over time. Sample investor asset allocation models are listed below, including percentage parameters for each of the three primary asset classes.
Conservative Investor Asset Allocation:
Stock funds: 20-40% | Bond funds: 55-65% | Cash funds: 5-15%
Balanced Investor Asset Allocation:
Stock funds: 35-65% | Bond funds: 45-55% | Cash funds: 0-10%
Growth Investor Asset Allocation:
Stock funds: 55-85% | Bond funds: 15-25% | Cash funds: 0-10%
Aggressive Growth Investor Asset Allocation:
Stock funds: 80-100% | Bond funds: 0-15% | Cash funds: 0-10%
You should ensure the investment risk assumed in your retirement account corresponds with one of the above sample investor allocation models. However, if you desire little (or no) risk in your retirement account during turbulent market conditions (because you have a low risk tolerance or a short investment time horizon) you should consider investing most of your retirement account in cash funds.
Is the Money Market Fund (cash equivalent fund) offered in my retirement plan the “safest” place within my plan to invest my account balance?
Yes. If you desire little (or no) risk in your retirement account during turbulent market conditions (because you have a low risk tolerance or a short investment time horizon) you could consider investing most of your retirement account in cash equivalent funds. The cash equivalent fund currently utilized in retirement plans at Union Bank is the Federated U.S. Treasury Cash Reserve Fund. It is considered the “safest fund” within your plan because it invests 100% in short-term U.S. Treasury securities. This fund is designed to preserve capital accumulated in your retirement account; however, the low return on this fund typically doesn’t outpace the cost of inflation.
Does the Washington Mutual bank failure affect my investment in the American Funds Washington Mutual Fund in my 401(k) account?
No. There is no connection between Washington Mutual (the bank) and the American Funds Washington Mutual Fund (the mutual fund). This means the Washington Mutual bank failure does not affect your investment in the American Funds Washington Mutual Fund.
If my retirement plan allows me to select my investment options, how can I change the selected investments in my 401(k) account?
Individuals eligible for a retirement account may have the ability to direct the investment of their account balance among the available investment alternatives. Three standard methods are typically available to change the investment direction for future contributions and also transfer funds currently held in your account. The methods include: completing an enrollment/change form, accessing your account via www.ubtrust.com, or through the Voice Response Unit toll-free at (888) 401-5669. Contact your employer for approved methods for your retirement plan. For inquiries on your User ID and Password, contact Union Bank & Trust Company at
(888) 769.2362.
The information and any statistical data contained herein is not intended to be investment advice. Contact a financial advisor for specific advice for your individual situation.