Rational Investing: Employees should avoid 401(k) plan mistakes

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Making mistakes is easyI've done it often in my career. Several of my favorite columns have been about some of my worst blunders. I must admit I rather enjoy writing about them, especially those that occurred so long ago that the pain is gone but the lesson remains.|ret||ret||tab|

This time it is not about my mistakes, but a compilation of those I have seen many 401(k)eligible employees make.|ret||ret||tab|

In the wake of the Enron 401(k) imbroglio there has been a considerable amount of confusion among participants in 401(k) plans in terms of how they should invest or even if they should invest in their employer's plan.|ret||ret||tab|

So let's look at the most common mistakes |ret||ret||tab|

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Not investing in the plan.|ret||ret||tab|

Are you one of the 20-25 percent of eligible workers not participating in a 401(k) plan? |ret||ret||tab|

Don't pass up the opportunity to accumulate wealth participate. |ret||ret||tab|

When we talk with any prospective clients who have the option to participate in a 401(k) plan, we always ask if they are contributing the maximum. If they are not, we encourage them to do so. It is a no-brainer, since most plans (over 70 percent) provide for at least a partial matching by the employer. The amount of the employer's contribution could be looked on as free money. |ret||ret||tab|

Too many eggs, too few baskets|ret||ret||tab|

According to recent research, approximately half of 401(k) participants invest in only one or two funds. Generally, 401(k) plans offer at least eight to 10 investment choices. Some offer so many it is very difficult for the average employee to make reasoned choices.|ret||ret||tab|

Don't make your selection based on only the best performing funds. Your risk tolerance may call for using as many as 10 investment styles to provide the correct allocation of assets. Work with your financial professional to assemble a portfolio that addresses your goals and your risk tolerance.|ret||ret||tab|

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Is this all there is?|ret||ret||tab|

Don't look at the plan assets in isolation. Use a "Big Picture" approach that considers all your investments on a consolidated basis. Include any other retirement plans you or your spouse may have. Your financial professional needs to know this information; otherwise it would be like expecting a doctor to treat you without knowing all your symptoms. |ret||ret||tab|

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Overlapping investments |ret||ret||tab|

One of the most frequent mistakes is selecting two or three funds and believing that diversification has been achieved. If the mutual funds you choose hold the same stocks that is not the case. Check the top 10 to 20 issues held by the funds. If there is overlap, go back to the selection process. Ideally, in a portfolio that uses asset allocation each fund will have no overlap and will have a low correlation to the other funds.|ret||ret||tab|

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Too much in company stock |ret||ret||tab|

In light of the Enron debacle this one should be easy. When the stock was going up everyone who had loaded up on it was happy (and greedy). You know what happened after that. |ret||ret||tab|

Tempting as it might be, and even if you feel by selecting company stock you are showing loyalty to the company beware. Here's a scenario: The company is having a difficult time, business is bad and the stock has declined in value and then, whammo, a pink slip! Do you really want your livelihood and your retirement assets married to the same company? If you are going to select company stock for a portion of your 401(k), do what the managers of the funds do limit it to no more than 5 percent. |ret||ret||tab|

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The plan as a lending institution|ret||ret||tab|

He (or she) may be out there, but I have yet to meet anyone who, after borrowing from a plan, paid it all back. Taking money from an account that is growing tax-deferred is a bad, bad mistake. Even worse is the possibilities of income taxes and penalties if it isn't paid back. This should be absolutely the last resort for use in only the most dire of emergencies. |ret||ret||tab|

Taking the money and running|ret||ret||tab|

It is natural for many to consider cashing out of a plan when leaving a company, but it is costly in two ways, the taxes and penalties, and the misapplication of funds that should be accumulating for retirement.|ret||ret||tab|

Although in the past the majority of workers under 35 cashed in their 401(k) accounts when they changed jobs, we are seeing less of this now, perhaps because young people seem to be becoming more knowledgeable about investing for retirement. (It is not unusual to hear a young person express doubts about Social Security being there at retirement.) |ret||ret||tab|

|bold_on|(Clark Davis is a 30-year investment veteran and CEO of Saint Louis Investment Advisors, a specialized money management company.)|ret||ret||tab|

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