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New Choices for a More Balanced 401(k) Plan

MUTUAL FUNDS / RUSS WILES

September 29, 1991|RUSS WILES

Besides selection, a good 401(k) plan will also feature the ability to switch periodically among investments, preferably as often as once a month, Fabian says. Jennifer M. Rello, a pension consultant in the Newport Beach office of Charles Schwab, stresses the need for good communication in educating and keeping workers informed. "I've seen plans die where people didn't understand the investment options."

Considering the large chunk of 401(k) money in GICs and single-company stock, it seems the education process has a ways to go.

401(k) Fundamentals * What are 401(k) plans? Company-sponsored retirement programs, named after a section in the Internal Revenue code, that let people sock away much larger amounts than they can in an IRA. Also, employers are allowed to contribute money on behalf of workers, and most do. * What are the tax benefits? The amount invested, by you and by your employer on your behalf, is deductible. That money then grows tax-deferred until withdrawn. * How much can a person invest? The 401(k) limit for an individual is $8,475 in 1991, with the amount adjusted annually for inflation. However, you and your employer can invest up to a combined $30,000, or 25%, of your pay, whichever is less, assuming that certain requirements are met. * How do 401(k) plans work? You select the amount you want deducted from each paycheck and decide where to invest the money from among choices made available by your employer. * Why do mutual funds make sense in 401(k) plans? With any long-term investment, you want diversification. The typical mutual fund, which holds dozens of stocks or bonds, provides this safety in numbers. Plus, the larger fund companies offer a wide selection of stock, bond and money market portfolios from which to choose--another form of diversification.

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