How To Fix Your 401(k)

If your retirement plan has taken some punishing blows, these remedies can ensure that your golden years aren't tarnished

load up on company stock. Many 401(k)s offer investors the chance to purchase company stock while the company match is made in stock. “A lot of people wind up with too much company stock,” says Hunt. “If your company runs into trouble, not only might the stock fall, reducing your retirement fund, you might be downsized. That’s too much risk to place in one company. Some companies restrict the sale of company stock by 401(k) participants but, if you don’t have to keep it, I’d suggest holding no more than 5% of your 401(k) in company stock.”

The perils of investing in company stock have become apparent to many 401(k) participants in recent years. For example, James A. Williams Jr. saw his Raytheon (NYSE: RTN) shares decline from around $75 in July 1999 to the $30 level in September of this year, a loss of 60%. Nevertheless, Williams, a director of engineering and product development at Raytheon’s Long Beach, California, office, says that he’s not nervous about the 25% of his 401(k) that’s invested in Raytheon stock.

“I think the stock will recover,” he says. “The current international situation may help the company, which produces defense systems and surveillance equipment.”

For 401(k) investors, deciding to buy stocks or bonds is only the beginning. Investment decisions must be made from among the available selections, which will vary enormously from plan to plan.

Jim Williams, for example, participates in a 401(k) where most of the selections are Fidelity funds. Aside from the 25% he has invested in Raytheon stock, the rest of his 401(k) consists of a 50% allocation to Fidelity Balanced Fund (FBALX) and 25% in Fidelity Equity-Income Fund (FEQIX). “These funds have solid long-term records,” he says, “with a mix of stocks and bonds. In 2000, which was a difficult year for stocks, both funds had positive returns.”

Haywood, who is Jim Williams’ financial planner, intends to go over these selections before the allocation for 2002 is determined. “I’m not comfortable with having a 50% allocation to any one fund, even a balanced fund that holds stocks and bonds,” Haywood says. “For next year, I’ll probably suggest doing fixed-income investing through bond funds. On the equity side, large-cap value stocks are emphasized by both of the funds he now owns, so there may be holdings that overlap. Jim might be better off if he spreads his 401(k) equity allocation among a few more funds, including some with growth stocks and some with small companies.”

Therefore, choosing 401(k) investments consists of finding funds that are available within the appropriate investment categories. But you shouldn’t blindly pick a fund just because it fits into your asset allocation.

“You should monitor your funds carefully to see how they’re performing, relative to other funds of their type,” says Alexander Williams. “If they continue to lag in their category or peer group, after a year to 18 months, see if your 401(k) offers a better-performing fund within that category.”

Longer term, Hunt says to get rid of

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