In recessionary times, don't shortchange retirement plans


New York -- Chalk up one more casualty of the recession: Employees are stashing less money in their company's tax-deferred retirement-savings plans.

The average participating worker put only 4.9 percent of salary into his or her plan last year, down from 5.2 percent two years ago. That's according to a recent survey of 1,518 firms by MassMutual Pension Management in Springfield, Mass.

These retirement plans, technically known as 401(k)s, are now offered by most large employers and about half of the smaller ones, MassMutual reports.

And chalk up one more casualty of investment inexperience: Employees are stashing the majority of their 401(k) money into the wrong kinds of investments.

An estimated 70 percent of 401(k) participants flock to fixed-interest accounts, which currently return something on the order of 7 percent to 8 percent. In recent months, even more money has been moving into fixed-interest investments, according to a survey by Towers Perrin, a consulting firm.

But after inflation and income taxes (taxes fall due when you take money out of your plan), fixed-income investments hardly grow at all. You'd be lucky to gain 1 percent a year in real purchasing power, which is pretty punk. You're shortchanging your own retirement fund.

Professional pension-fund managers keep a substantial portion of their money in stocks, which, over long periods of time, perform substantially better than fixed-rate investments. The wise 401(k) participant should be doing the same, by investing in the stock-owning mutual fund that most plans offer.

Unfortunately, most workers shy away from this choice. They're scared by the stock market's sudden ups and downs. They don't understand that, over 10 or 20 years, a stock fund will

outperform a fixed-income fund by a couple of percentage points a year, says Doug Edwards of the consulting firm Foster Higgins.

An even more basic investment mistake is not to join your 401(k) plan at all. Around 30 percent to 40 percent of all eligible workers are not contributing. The young, in particular, think they can't afford to.

In my view, you can't afford not to. The 401(k) plan is the best investment deal in America today. First, you get automatic savings -- because a fixed amount of money comes out of your paycheck every month. Second, you lower your income-tax bill -- because both your contribution and the money it earns are tax-deferred.

/# And third, you may get free mon

ey from your employer. Around 70 percent of employers match your 401(k) contribution, either in cash or with company stock, according to the survey by MassMutual. You might receive 50 cents or $1 for every $1 you put into the plan, up to a certain percentage of pay. That's an instant 50 percent to 100 percent return on your money! If you need some funds before retirement, most plans will grant you a tax-free loan.

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