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Don't Panic. Don't Stop Saving.
When the Going Gets Rough, the Nest Egg Looks Especially Fragile

By Simone Baribeau
Special to The Washington Post
Wednesday, October 15, 2008

The stock market isn't cooperating with Glen Harley's retirement plans.

The executive assistant to a bar council hoped that, by now, she'd be approaching the end of her working days. She has a small pension. She started saving over a decade ago. But the return on her retirement savings accounts -- including Individual Retirement Accounts and the governmental equivalent of a 401(k) -- has been minimal. And she and her husband are still paying off their mortgage.

"We don't see ourselves retiring. Prices are up and of course all the retirement that we've had has just gone south," said Harley, 61. "It just leads you to question whether it's good to keep investing for the future."

Harley isn't alone. As new crises keep roiling the financial markets, people of all ages are wondering what to do about a looming financial crisis of their own: retirement. What's the best way to protect your nest egg as the financial system sorts itself out?

Experts agree: don't panic and don't stop saving. People emotionally involved with their money tend to make bad financial decisions, and people who don't save are guaranteed a distant retirement. What's more, the matching contributions offered by some employers help pump up retirement accounts.

But beyond that, opinions are mixed on what to do with retirement accounts in the current environment. As usual, the downturn has rekindled the age-old debate: are people better off with a "stay the course" strategy, ignoring the market swings and basing their risk on how long they have until retirement, or is this the wake-up call people need to become more involved with their portfolios?

Many financial advisers say that trying to beat the market just doesn't work. Instead, they argue, workers should pick a diversified portfolio with a risk level appropriate to the length of time they have until retirement.

Michael Eisenberg, 28, is following that advice. "I'm not making any changes. I continue to fund my 401(k) through my company plan," he said. And the McLean resident is aggressively saving: he estimates that he puts 17 to 20 percent of his pretax income toward retirement savings. He's not worried about the losses. "Ideally the market is cyclical," he said.

Indeed, a bevy of studies from the 1970s through the 1990s suggest that people tend to do better with low-cost funds that follow the market than they do when actively investing in stocks. And getting help choosing funds doesn't seem to help, either: people don't see many tangible benefits when they buy a mutual fund through a broker or financial advisor, according to a Harvard Business School study of broker-sold and direct-sold funds.

But sitting tight while your savings shrink requires discipline.

"Don't go online and check your 401(k). Don't do it," said Jean Lown, professor in the Family, Consumer, & Human Development Department at Utah State University. "Don't discuss it for more than five minutes. After five minutes, change the subject."

One of the best ways to ignore the market but still adjust your risk levels, she says, is with life stage or target date funds.

The funds, which invest workers' savings in progressively less risky securities as they approach retirement, have become gained in popularity over the last two years. Almost half of 401(k), combination and profit-sharing plans had target funds as their default option in 2007, compared with 30 percent in 2006, according to a draft of the Profit Sharing/401(k) Council of America's annual survey.

But others warn that a hands-off approach presents risks of its own. In many cases, workers could mitigate risk if they know what they're holding. "Get as much transparency in what you own as you possibly can," said Saxon Birdsong, chief executive of Baltimore-Washington Financial Advisors (BWFA). "Mutual funds don't have very good transparency . . . when you deal with collective investment funds, you don't know what you own." And, he says, you can end up blindsided by a fund that over-invested in a company such as Lehman Brothers, Fannie Mae or Freddie Mac.

"Right now anything that requires leverage -- you've got to think about removing yourself from it. Anything that relies on the capital markets needs to be questioned," said Timothy J. Maurer, director of financial planning for the Baltimore financial advisory firm the Financial Consulates.

Workers who want to manage their own money may have trouble doing so through their employer-sponsored retirement fund. Fewer than one in six companies offer employees the ability to choose individual stocks to invest in, according to the Profit Sharing/401(k) Council of America's annual survey. And those interested in active investing should already have a reasonably sized nest egg, Birdsong said: he recommends investing at least $300,000 in no fewer than 40 stocks, otherwise transaction fees and risk are prohibitive. But taking assets out of the market is a far more common reaction to turmoil than getting more involved in risky stock transactions. Since January, over 70 percent of transfers within 401(k)s have been to stable-value funds, the approximate equivalent of holding cash, according to Hewitt's August 401(k) index survey. About half of 401(k)s offer this option.

Some experts say that selling now means locking in your losses at a time when the market may be approaching its bottom.

"The proverbial horse is already out of the barn," said Rick Meigs, president of 401khelpcenter.com, a Portland, Ore., company that advises groups in the retirement investment industry. "The time to have gotten more conservative was six months ago. If we had only known."

Some financial planners, of course, did know. "Last year we were edging upwards to 30 or 40 percent cash and now we're at 50 percent cash," Maurer said. Workers should still consider putting upward of 50 percent of their retirement savings in investments that maintain a stable value such as money market funds, Maurer said. If the market continues to deteriorate, there might soon be opportunities to buy back in.

But these days, even these "stable-value" options aren't risk-free. These investments are meant to return all principal along with income from a specified interest rate. Some major banks, however, sold auction-rate securities, calling them "safe as cash," and then froze investors' accounts last February when the securities became illiquid. And in September the value of a dollar invested in the Reserve's Primary Fund dropped to 97 cents.

"The only way you're guaranteed not to lose any money is with an FDIC-secured certificate of deposit or [by] buying Treasury bills directly," said BWFA's Birdsong. "And neither Treasurys nor CDs are likely to keep up with inflation." The Treasury Department has since offered to guarantee money market funds regulated by the Securities and Exchange Commission for a period of three months, in exchange for a fee.

Another way for workers to mitigate risk -- for those who have the option -- is to reduce their stock holdings in the company they work for. About 11 percent of employees' 401(k) assets were held in company stock, according to the Employee Benefit Research Institute, a nonprofit.

No matter how much workers believe in their companies, holding lots of stock in any one company is a risky proposition.

"Do we remember Enron?" said Lown, the Utah State professor. Too many people have way too much of their retirement savings in their company stock, she said.

More recently, employees at Lehman, Fannie, Freddie and a plethora of other financial-sector firms took a hit on their companies' stocks.

Know your company's divestment policy, and as soon as you can, sell, Lown said.

Eisenberg needn't worry about divesting from company stock, because he works for a nonprofit. But he's taking two lessons away from the current market turmoil. "One, I'm continuing my retirement strategy," he said. "And two, I need to work longer."

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