Mellody's Math: Making Over Your 401(k) Plan
N E W Y O R K, Nov. 26 -- Workers lucky enough to avoid getting laid off this year may face a different problem: some companies are suspending or decreasing matching contributions to 401(k) plans.
General Motors, Delphi Automotive Systems and U.S. News & World Report have all cut back on matching contributions to 401(k) plans as part of cost-saving measures. Though these type of cutbacks have not been widespread, analysts are warning that more firms could also chop 401(k) contributions if the nation slips into a severe recession.
You could be next. Employees should take steps to protect their retirement funds. One important step: Invest the maximum amount allowed into your 401(k).
To safeguard your long-term financial goals, first make sure to max out your 401(k) contributions. If you are not currently maxing out your contribution, try your best, because now is a better time than ever, as you need to compensate for the (possible) cuts in your employer match.
See Mellody's 401(k)Survival Checklist
Amid the stock market turmoil of the last 18 months, many people saw their 401(k) plans take a beating. Yet only about 80 percent of 401(k) participants have changed their asset allocation since they started the plan. To explain how to do a 401(k) makeover, I took a look at where one couple went wrong to explain how they could fix the problem.
One Couple's 401(k) Problem
When Cheryl and Alex Peterson met, they each had about $60,000 in credit card debt, but they decided to buckle down and start saving diligently. Now out of debt, the couple, both 33-year-old Boeing employees, bought a house this fall. But their 401(k) plans have been hurting ever since the market soured.
Both of their 401(k) plans were heavily weighted in the most aggressive areas of the stock market. They had invested 60 percent of their money in a science and technology fund, which saw a 74.7 percent decline in one-year returns through Sept. 30, 2001.
The remaining balance of their 401(k) plans were in large-company growth stocks, which were the hottest area of the market — up until March 2000. As is often the case when the markets decline, the best performers have the furthest to fall, and that is what happened.
