Hang On To Your 401(K) Plan: It Could Be a Rocky Ride, So Think Long-Term, Don't Panic

If the events of the past week have you thinking about making big changes to your 401(k) plan allocation, be careful. Acting out of panic could cost you a lot of money over the long term.

The experts say your investment objectives and your time horizon should trump both panic and any temptation to jump heavily into speculative behavior. The first thing not to do is give up on saving and investing altogether.

"Keep saving no matter what you do," said Robert Brokamp, adviser of The Motley Fool's Rule Your Retirement investment newsletter service.

Brokamp said a lot of people tend to equate their 401(k) plan with the investments in it – and stop investing when the balance starts to go down. But, he said, the tax benefits of investing in a 401(k) plan don't go away when the market goes down. Plus, lower stock prices mean that you're getting more shares for your money. That's a good thing.

For the same reason, Brokamp said, moving all of your money to cash until the market volatility blows over is a bad strategy. Doing that, he said, means missing out on the opportunity to buy shares at a discount now that could be worth a lot more money later.

"If you don't need the money for 10 to 20 years, that's really not the thing to do," Brokamp said.

Decide What to be Afraid Of

Mark Robinson, who leads investment seminars for the Investor Education in Your Community program, agrees.

"People in 401(k) plans are net buyers," Robinson said. Thus, it is to their advantage to see periods – even long periods – when stocks are trading at a discount. Such periods, he said, allow average investors to accumulate far more shares than they otherwise could buy.

"You have to decide what you want to be afraid of," Robinson said.

It is wiser to be afraid of running out of money later in life than it is to be afraid of market volatility now, Robinson said. He admits that it can be hard to keep thinking long term when the market is likely to face "quarters and quarters" of rough times – which is what he expects. But the alternatives – not investing or investing only in cash-like options – are "not viable" because of the long-term price you will pay in lowered investment returns.

Robinson and Brokamp both said they expect no quick turn-around for Wall Street and cautioned that investors should be prepared for that. And because of that, they urge investors to be diversified. That means investing in an array of equity and fixed-income assets and not taking unreasonable bets on any one thing.

Brokamp said this is also a good time to look at costs. If your 401(k) plan is full of high-cost mutual funds, he said, you'll want to agitate for the inclusion of lower-cost options. Index funds (which track the performance of leading indexes) are the least-expensive options. But even with actively managed funds, he says, there is no need to pay more than 1 percent of assets in management fees.

Brokamp also said this might be a good time to make the switch from a traditional IRA plan to a Roth IRA because the tax consequences will be less if the asset value had dropped. And as always, he added this is a good time to look at "harvesting" some losses for tax purposes in investment accounts outside your tax-deferred retirement savings plans.

Knowledge is Power

Jerry Kalish, president of National Benefit Services Inc.,  Chicago-based employee benefit consulting and administrative firm, said this is a good time for business owners and other retirement plan sponsors to make sure employees really understand the risks they are taking as investors.

"Over the last few months, the investment markets have been volatile, and some employees have expressed concern," said Kalish, who also is publisher of the Retirement Plan Blog.  "While we can't give employees specific investment advice, we can say that this may be a good time to think about risk and how much you are willing to assume."

He said investors need to:

• Be knowledgeable about their investments and the risks involved with each one.
• Remember that a 401(k) plan is a long-term investment and investing for the long-term may help reduce the impact of volatility.
• Know how asset allocation can be used to limit risk.
• Be comfortable with the strategies they use. If an investor is not comfortable with his or her current investment plan, it may be time to review that investor's investment objectives.