401(k) First-aid Kit

The 74-year-old retiree, who in his career held sales positions in fields as various as real estate and irrigation supply, has seen the balance in his retirement account take a beating over the course of the past year.

He and his wife held what they thought to be a conservative portfolio that would be able to weather the economic storm ravaging the markets for the better part of the past year. Unfortunately, that was not the case because his portfolio was most heavily weighted into bond funds. (Though it shares the name, bond funds are not really fixed-income investments like actual bonds.)

“Frankly, we don’t know what the future holds,” says Dellinger, a Hudson resident, as he takes a break from the bicycle ride he had been taking on a recent sunny day near downtown Hudson. “We won’t miss a meal, but a [vehicle] replacement is not in the game. And vacations? Forget about it.”

Though Dellinger declined to discuss for the record the specific investments in his portfolio, he did say that he thinks often about what has happened to his portfolio during the past several months. “It’s always on our mind,” he says.

The market has been on an upswing recently, but the damage is already done for many 401(k) plans. Many 401(k) investors would rather not even know the gory details their statements hold, says Brian Dean, an executive vice president with CBIZ Financial Solutions Inc., which advises employees on their 401(k) plans.

“The average guy is just numb with fear,” Dean says. “These are the guys who do nothing, including opening their statement.”

But Northeast Ohio’s investment experts insist employees don’t have to sink to that level of denial. There are simple steps that can be taken, whether the 401(k) participant is 24 years old or 74, to ensure they stay on the path to a worry-free retirement.

The 20's

For the youngest of 401(k) investors, those with a solid 30, 40 or perhaps even 50 years until retirement, time is on your side.

“These are the real winners of this collapse,” says Azim Nakhooda, chief investment officer and principal at Cedar Brook Financial Partners in Mayfield Heights. “They’re buying everything on sale, and they definitely haven’t lost as much.”

Local financial planners say this particular age group should pay down debt first and then invest as much of their income as possible to their retirement plan. The longer that money is in the retirement plan, the greater the level of compounding or the ability to generate earnings off a previous investment.

“The power of compounding is pretty phenomenal,” Dean says. “When you combine the power of matching [company contributions] to the power of compounding, it’s pretty awesome.”

And because young investors have such a long time until they reach retirement, they needn’t be as gun-shy about a further downturn, says Douglas S. MacKay, chief investment officer and CEO of Broadleaf Partners LLC in Hudson. This group should focus on equities, many of which are currently at bargain prices, and perhaps some corporate bonds as well, he says.

Like their younger counterparts, those in their 30s also should not stay up at night worrying about what the market might do tomorrow, planning experts say. “Nobody is going to hit a home run,” says Howard Kass, tax partner at accounting, auditing and financial services firm Zinner & Co. LLP in Pepper Pike. “It’s a slow and steady process.”

For those younger investors to whom a financial statement might as well be written in a foreign language, the lifecycle, or so-called “target-date” fund, can be a lifesaver, says Dean. These funds take into account when an investor plans to retire and automatically adjust its asset allocation accordingly.

For instance, Dean says a lifecycle fund that assumes a retirement in 2010 will be much more heavily invested in bonds, while a fund assuming a retirement some 30 years later would lean more heavily toward stock funds.

Eric Endress, an investment analyst at CBIZ, says his company has researched these funds and found that asset allocation, even among funds assuming the same retirement date, can vary substantially. So it’s important to do your homework when considering a lifecycle fund and make sure its investment choices match with your own personal comfort level when it comes to investing.

And if your company doesn’t offer a target date fund that suits you? Not to worry, Dean says. Just investigate the holdings of a lifecycle fund you like and try to replicate its asset allocation from the choices offered in your 401(k) plan.

Now is the time to possibly start thinking about bulking up the fixed-income portion of your portfolio, says MacKay. The average 40-year-old investor might be 20 to 25 percent invested in fixed-income investments such as bonds.

“I wouldn’t go any higher than that,” MacKay warns.

Investors at this age should begin honing their financial plan, says Scott Bailey, regional director of investments with NatCity Investments, now a part of PNC. “Have you done your financial planning, rebalancing? You should become slightly more conservative, because you are closer to using those assets,” he says.

This is also a great time to start thinking about seeking professional help for your portfolio if you haven’t already done so, says Kevin Davenport, a wealth management adviser at Northwestern Mutual’s office in Cleveland.

“Asset allocation becomes much, much more important,” he says. The reason, Davenport says, is because the finances of workers in their 40s are becoming more complex. They are not only faced with the prospect of paying for their own retirement, but also their children’s college education.

Today’s investors who are in their 50s are fearful, Cedar Brook’s Nakhooda says. Retirement is not far off, and there is a good chance that, like Ron Dellinger of Hudson, the value of their retirement portfolios has taken a nosedive.

The key for these people, he says, is “to get paid while they wait” for the market to recover. “They should be looking for yield,” he says. These investors should be looking for investments paying solid dividend yields.

Also, at 50, today’s investors should be taking stock of all the assets they own, including their home and possible second house.

“What kind of funds do you need to live off of in retirement? That kind of exercise can be beneficial,” he says. “You can design your portfolio around it.”

For those at the end of their career or those for whom retirement has already begun, it might be time to think about transitioning to a more conservative portfolio. “Once you get within five years of retirement, you need to tap the brake,” CBIZ’s Dean says.

But don’t forget entirely about the money in your equity account. Those funds will still play an important role in your postretirement life. Dean says retirees should decide how much money to allocate to fixed-income accounts and how much should go into the stock market. Once that decision has been made and retirement is underway, these investors can draw down their fixed-income accounts to help with living expenses. The money in the equities account can be used as a well to replenish the funds taken from the fixed account. But the idea, Dean says, is to not touch the principle in the fixed account.

Plus, just as Nakhooda suggested for investors who are in their 50s, MacKay says that it is also important for investors who are 60 years old or older to hunt for income-producing securities.

Worried as he is about his own retirement, Ron Dellinger has a calm look in his eye as he sits astride his bike. He may be concerned about his current financial situation, but Dellinger remains optimistic about the country’s long-term financial future.

There is also reason to be optimistic as a 401(k) investor, despite the pain many have felt recently, CBIZ’s Dean says — so long as the investor remains disciplined.

“Don’t try to time the market,” he says. “Don’t try to do it yourself if you’re not going to do your homework. [Those types of investors] end up trying to chase last year’s winners or last quarter’s winners.”