A 401(k) plan provides you with the option to allocate your money to the investments you want or to allow your plan manager to make the choices for you. It is certainly advisable to talk with the organization that manages the plan and discuss what your investment options are. Your employer can provide you with the contact information for your plan advisor. Stocks, mutual funds, and bonds are usually among the options. A 401(k) is usually safer than attempting to invest in the stock market on your own unless you are very knowledgeable or have a good stock broker.

The type of investments you choose for your 401(k) assets will probably be affected by:

1. How close you are to retirement: The closer you are to retirement, the more of your money you may want to move into stocks that are more conservative and less risky so that more of your money is preserved.

2. How much you are willing to risk: The more willing you are to take the risk that the value of your 401(k) assets will rise and fall with the markets, the more money you may want to invest in options like stock mutual funds. Many financial advisers suggest that when the economy is in decline, it is best to sit tight and wait it out instead of panicking and withdrawing your money from these funds.

3. How much you have in other savings plans: If you have other savings plans, such as an IRA, CDs, or whole life insurance, you may want to invest your 401(k) money in riskier stocks or mutual funds.

Managed funds is a package that is put together by the plan manager. This package consists of stocks and bonds in varying degrees of risk. These degrees of risk may look like this:

• Aggressive model fund: Invests 20% of its assets in bonds and 80% of its assets in stocks.
• Conservative to moderate model fund: Invests 28% of its assets in Money Market funds, 30% of its assets in bonds, and 42% of its assets in stocks.
• Conservative model fund: Invests 40% of its assets in Money Market funds, 36% of its assets in bonds, and 24% of its assets in stocks.
• Moderate model fund: Invests 40% of its assets in bonds and 60% of its assets in stocks.

If your plan manager offers a call center where you can speak to a representative who is hired by your plan and is objective, take advantage of his or her expertise. Since he or she is not trying to sell you a product, they can walk you through all the options in your 401(k), how it works, and offer you some investment advice on how to allocate your money.

Many 401(k) plan participants have more than 20% of their money tied up in their employer’s stock. While the opportunity to own company stock is an important benefit, you need to ensure that the bulk of your savings are not concentrated there. It is very important to diversify your investments.

The following is a recommended breakdown of how to invest your money according to how close you are to retirement:

• 30s and younger: 100% in stocks
• 40s: 80% in stocks and 20% in bonds
• 50s: 75% in stocks and 25% in bonds
• 60s: 70% in stocks and 30% in bonds
• 70s and older: 50% in stocks and 50% in bonds

One of the great things about investing in a 401(k) plan is that you invest money a little at a time and not all at once, which is exactly what stock brokers recommend you should be doing when the stock market is unstable. While you may not view your 401(k) as investing in the stock market, that is exactly what you are doing. It is important to remember that “bull markets,” markets in which stocks are rising, always follow “bear markets,” markets in which stocks are falling. History shows that once the stock market hits rock bottom in a recession, about a year later, stocks generally grow rapidly.

Financial advisers generally advise against adjusting your 401(k) allocations to favor more conservative investments in an attempt to protect your money just because the economy is in a falling market and especially advise against stopping contributions to your retirement plan or cashing it out entirely. Market fluctuations and downturns are normal. While it is important to consistently examine the types of investments in your 401(k) and how you are doing, if you are too conservative, you run the risk of outliving your money.

If you don’t have a 401(k) plan, this is a great time to do a little research and get a potential allocation plan worked out. Start by deciding how much risk you are willing to take. Then figure out how much you need to save for retirement, and calculate how much to set aside each month to reach that goal based on an average annual rate of return. Knowing these things will help you select appropriate investments when you are ready to start your account.

Questions You Should Ask about Your 401(k)

When you start a new job or anytime you want to join a 401(k) plan, there is certain information you need to make good decisions about your plan. Even if you already participate in the plan, ask your employer or plan manager for the answers and fill the answer in on the appropriate line.

1. When you will become eligible for the 401(k) or retirement plan?
2. What percentage will be deducted from each paycheck?
3. How and when can you change the amount you contribute?
4. How can you change the funds your money is invested in?
5. How and when you can stop making contributions at all if you so choose?
6. What is the vesting (employer contributions to your plan) schedule?
7. Is the matching contribution in the form of company stock or cash?
8. Can your plan be rolled over if you terminate employment?
9. What are the penalties for early withdrawal?