Show #328 Airing: Sunday 1/22/06
The start of a new year is a great time to take stock of your stocks, as well as your bonds, cash, and other investments. Maybe most overlooked are 401(k)s. Here to explain why adjusting your 401(k) can be the right financial fix for 2006 is Jim Lineweaver, founder of the Lineweaver Financial Group.
Question: What does reallocating your 401(k) distribution mean?
Answer: Reallocation is the process of moving money inside your account from funds you presently own to other funds available inside the plan.
In many plans, this may be a two-step process; allocating funds currently in the plan and making changes in the allocation of new contributions going into the plan.
Question: Should everyone who has a 401(k) reallocate their funds?
Answer: I wouldn’t say that everyone should change the investment mix they have on an annual basis, but the current asset allocation should be reviewed to see if any changes are appropriate at least annually. We like to call it an annual financial check-up. This evaluation is both a review of the past year’s performance and a time to see if any changes are appropriate, based on the outlook for the coming year.
Question: Can you give an example?
Answer: Over the past year, we have seen interest rates, at least short term rates, increase. And I would expect that to continue, based on what we have heard from the Fed. We started making changed in our clients’ portfolios over a year ago to reduce the negative impact rising interest rates would have had.
Now I would assume there will be people that are listening to use that will review the performance of their 401(k)s and see their bond funds didn’t perform well over the past 12 months, and they will want to see those funds and move their money into funds that did perform well over that past 12 months. This is what a lot of people do. Basically, they are using yesterday’s news, and that might not be the best course of action.
Question: Since 401(k)s are sponsored by employers, do employees have someone to turn to for advice in making these adjustments?
Answer: In most cases, unfortunately, the answer is no. The plan sponsor will provide information on past performance, but little in the way of advice on asset allocation. This puts lots of people in the awkward position of having to make investment decisions, which will impact their financial future, with little or no experience or training.
Question: Does this reallocation apply to other accounts or investment vehicles?
Answer: Good question. The concepts we are talking about, annual reviews and being proactive, apply to all types of investment plans, like IRAs, Variable Annuities, 4039(b)s and on and on. Unfortunately, those concerned about their 401(k)s have to go it alone. With many other investment vehicles, people can get professional advice as to how to manage their assets.
Reallocation can be tricky, and many times you’re on your own making these potentially costly decisions. Jim Lineweaver has “allocated” time to answer your questions, if you call.
