Check Your 401(k)
Diana Ransom
Jul 2, 2006
While cash has a place in your portfolio, it probably shouldn't be the centerpiece of your retirement savings. But that's often the case for people who allow the money in their 401(k) retirement plans to be invested by default.
About one quarter of companies automatically sign their new employees up to contribute to 401(k)s. And unless employees specify another destination, almost half those firms direct workers' contributions to money-market or stable-value portfolios, according to a recent survey by Hewitt Associates, a Lincolnshire, Ill., human-resources firm.
Those conservative investments can be a poor choice, particularly for younger workers. Financial advisers say workers with decades until retirement should have significant exposure to stocks, which bounce around in price but have delivered higher returns than cash and bonds over long periods of time.
"Time horizon is really the most important investment consideration" in designing a portfolio and younger workers who don't invest in higher-growth funds have the most to lose, says James Wilson, a financial planner in Columbia, S.C.
One of the easiest ways to invest your 401(k) more smartly: Pick a "lifecycle" or "target-retirement" fund that provides a reasonable mix of stocks and other holdings based on the year you expect to retire.
Indeed, these one-stop portfolios are becoming the default 401(k) pick at an increasing number of companies -- now just over half, according to Hewitt.
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