When Wall Street is going gang-busters, even the most conservative investors loosen up and take on more risk in their portfolios than usual.
Confident in the market and riding the
“good times,” they forget the golden rules of
investing.
“The fundamentals of investing are to
diversify and balance your risk,” says Craig
Johnson, president and CEO, Franklin
Bank, Southfield, Mich. “I think a lot of people forgot those fundamentals when the
stock market was so good.”
Every employee with a retirement plan is
watching his or her savings erode, though
long-term investors — which is anyone in
the market for five years or longer — will
see the market rebound eventually. For
some, the current economy is a hard-learned lesson in being prudent in good
times and bad. But regardless of one’s financial position, news headlines are sparking
serious concern for retirement dollars.
As employees consider their 401(k) contributions and re-evaluate investment portfolios for fiscal 2009, business owners can
do a great service by offering education and
access to financial advisers who can provide practical retirement planning insight.
Smart Business spoke to Johnson about
what employers should communicate to
their staff concerning retirement plans and
the investment alternatives that banks offer.
What should employees understand about
their company 401(k) plans in light of Wall
Street’s volatility?
As an employer, you have employees who
contribute to a company 401(k) plan, and
they are afraid because they see their
money evaporating. Some may be tempted
to stop participating in the program or to
decrease their contribution level. Explain
to employees that neither is a wise, long-term investment decision. Here’s why. A
401(k) plan offers two features not available anyplace else. One is tax savings.
Contributions to a 401(k) are not subject to
federal income tax upon deposit. There is
no bank mutual fund or credit unit that will
provide that instant return on your investment. Two, most employers match a certain
percentage of employees’ 401(k) contributions. Because of this, a 401(k) is probably
the most lucrative, long-term investments
out there. Finally, by contributing to a
401(k), employees essentially are buying in
to the stock market. You know the old saying, ‘Buy low, sell high.’ Now is the time to
buy — everything is on sale.
What about pre-retirees who are considering
pulling all funds from their retirement
accounts?
One of the biggest mistakes people make
near retirement age is getting too conservative with their plans, thereby limiting their
returns. The goal is to not outlive your
money. Pulling funds from an investment
account to invest in a low-interest CD, for
instance, may feel ‘safe,’ but what’s safer?
Taking a little risk and maintaining higher
returns for longer or cashing out of the market with the reality that the money will dry
up in less time? Individuals are asking
bankers about rolling retirement funds into
CDs because they get FDIC insurance and
avoid stock market volatility. Make sure
this decision is not based on the events of
the day. Stop and count to 10. Make rational decisions, not emotional ones.
Are there alternative bank products or other
retirement savings vehicles that satisfy those
with low risk tolerances?
An individual might consider a bank CD
for a portion of savings, though exiting
from the market completely is not a sound,
long-term decision. An honest discussion
with a financial adviser should preface discussion with a banker concerning savings
products and mutual funds. Some banks
provide wealth management services; take
advantage of those offerings. Ask about
annuity products. Traditionally offered by
insurance companies, these products have
evolved over the years. Wealth managers
are offering them as an option for individuals who want more risk protection and
‘upside’ opportunity. Also, companies can
attach a Roth 401(k) feature to their 401(k)
plans. Unlike traditional Roth IRAs, with
the Roth 401(k), employees can contribute
up to $15,500 if they are under the age of
50. That money grows tax-deferred and is
tax-free at retirement.
What education can managers provide
employees to help them make wise, long-term fiscal decisions concerning retirement
plans?
Employers can ease concerns about participating in company retirement plans by
connecting their work force to experienced bankers and advisers. Let employees know that the company is partnered
with a financial institution and team of
advisers. Now is a great time to invite a
professional to speak about the market,
retirement planning and the importance of
thinking long term. Most financial advisers
partnered with retirement plan providers
or banks will give presentations and consult with employees for free. Arrange a
mandatory meeting at your business, and
allow employees to sign up for one-on-one
sessions after the talk. The confidence
employees gain through education will
help them make wise investment and
banking decisions.
CRAIG JOHNSON is president and CEO of Franklin Bank, Southfield, Mich. Reach him at [email protected] or
(248) 358-6459.
