Many participate in employer-sponsored, defined-contribution pension plans.  It is important to make the most of any money invested in those plans.

Defined-contribution plans, like 401(k)s, 403(b)s and similar plans, have largely replaced the defined-benefit plans that were common between World War I and the 1970’s. With those plans, the company promised a certain (defined) benefit amount per year to retirees who worked for the company for enough years to qualify. How it got the money to pay those pensions was the company’s problem.

And it was a problem because in the late 1960s and early 1970s, some big employers failed to fund their pension plans adequately. They were also able to “manage” their reported earnings by contributing a greater or lesser amount to their pension funds in a given year. This and other issues led to the Employee Retirement Income Security Act of 1974 (ERISA). Among other things, ERISA put tough new funding standards in place to ensure that employers adequately funded their defined-benefit plans.

As many ambitious regulatory projects do, this one brought about unintended results. Employers responded by phasing out those defined-benefit plans over the years and replacing them with defined-contribution plans with less onerous requirements.

With a defined-contribution plan, the company makes no promises of any particular pension payment amount. Instead it contributes a certain (defined) amount to your pension fund each year, usually in the form of an employer match to amounts that you contribute yourself, up to a limit. You then decide which of several investment choices you want to use for your own pension fund. Your eventual pension amount will depend on how much money is in your fund in the future, including your contributions (if any), your employers’ contributions (if any), and the gains (or losses) resulting from your investment choices. Whether the pension payments are enough to support you, or whether in fact there is any money at all in your pension fund when you retire, is your problem.

rallen

This means that as employees, we now bear the full risk of having enough retirement income.

This is both a blessing and a curse. The blessing part is that we do have some choices as to how our pension money is invested. The curse part is that we are forced to make those choices, whether we feel qualified to do so or not. And if we make the wrong ones we could end up broke.

One of the decisions we must make is the choice of what investment vehicles to select from among the choices offered by our particular plan. Usually we are offered a few mutual funds from a single mutual fund family. These will often include funds in the following categories:

  • Stock funds – actively managed

  • Stock funds – passively managed, like index funds

  • Bond funds

  • Blended funds including both stocks and bonds, including target-date funds

  • Money market funds

  • Occasionally, precious metals funds

It is important to realize that any mutual fund can either lose money or make money in any given year. None have guaranteed returns. Stocks have good and bad years, and so do bonds and precious metals. Virtually all stock funds will lose money in a down market year, whatever specific stocks they include. Most bond funds will lose money in a year when interest rates rise sharply. Gold fluctuates from year to year.

So, it is important that some of your eggs are placed in different baskets, so to speak, in terms of asset classes. It’s rare that stocks, bonds and gold are all down in any one year, so it’s a good idea to have some money in each one. How much of each to have is a choice that is individual to each person. Those with a very short time horizon, because of approaching retirement, will need to have a heavier mix of short-term bond funds for safety and some cash flow. Those with decades to go can afford to be more aggressive, allocating larger percentages to stocks and possibly precious metals.

There’s a lot more involved to dynamically managing your 401(k), as taught in our Proactive Investor class. For more details, contact your local center.

Learn to Trade Now

This content is intended to provide educational information only. This information should not be construed as individual or customized legal, tax, financial or investment services. As each individual's situation is unique, a qualified professional should be consulted before making legal, tax, financial and investment decisions. The educational information provided in this article does not comprise any course or a part of any course that may be used as an educational credit for any certification purpose and will not prepare any User to be accredited for any licenses in any industry and will not prepare any User to get a job. Reproduced by permission from OTAcademy.com click here for Terms of Use: https://www.otacademy.com/about/terms

Education feed

Editors’ Picks

EUR/USD clings to 3.5-week’s high, trades above 1.1000 figure

The pair is challenging the 1.1047 resistance. EUR/USD bull recovery from 34-month lows remains intact. Further coronavirus headlines are awaited.

EUR/USD News

GBP/USD hits new 2020 low and bounces amid Brexit rhetoric, coronavirus headlines

GBP/USD is trading above 1.2800 after hitting a new 2020, nearing the 1.2700 figure, as concerns about a no-trade-deal Brexit are weighing on the pound. Modest recovery seen in USD during the American session keeps the bearish pressure intact.

GBP/USD News

USD/JPY hits seven-week lows under 108.00 as markets panic

Flight-to-safety dragged USD/JPY below 108 for the first time since early January on Friday. Although the pair recovered modestly to 108.20, it remains on track to erase more than 300 pips this week.

USD/JPY News

Editors’ Picks

EUR/USD clings to 3.5-week’s high, trades above 1.1000 figure

The pair is challenging the 1.1047 resistance. EUR/USD bull recovery from 34-month lows remains intact. Further coronavirus headlines are awaited.

EUR/USD News

GBP/USD hits new 2020 low and bounces amid Brexit rhetoric, coronavirus headlines

GBP/USD is trading above 1.2800 after hitting a new 2020, nearing the 1.2700 figure, as concerns about a no-trade-deal Brexit are weighing on the pound. Modest recovery seen in USD during the American session keeps the bearish pressure intact.

GBP/USD News

USD/JPY hits seven-week lows under 108.00 as markets panic

Flight-to-safety dragged USD/JPY below 108 for the first time since early January on Friday. Although the pair recovered modestly to 108.20, it remains on track to erase more than 300 pips this week.

USD/JPY News

Crypto summer will be back in the next spring

The attention of the financial world is right now on the equity segment. The force with which prices are moving down is extraordinary, with terrifying technical details such as a close below 3000 points on the S&P 500… 100 points down!

Read more

XAU/USD tumbles near two-week’s lows, sub-$1600/oz

Gold has been dropping sharply this Friday while reaching the 200 SMA on the four-hour chart. XAU/USD bulls gave up as sellers took the market down sharply. The bears seem to be in charge and more down could potentially be expected. 

Gold News

RECOMMENDED LESSONS

7 Ways to Avoid Forex Scams

The forex industry is recently seeing more and more scams. Here are 7 ways to avoid losing your money in such scams: Forex scams are becoming frequent. Michael Greenberg reports on luxurious expenses, including a submarine bought from the money taken from forex traders. Here’s another report of a forex fraud. So, how can we avoid falling in such forex scams?

What Are the 10 Fatal Mistakes Traders Make

Trading is exciting. Trading is hard. Trading is extremely hard. Some say that it takes more than 10,000 hours to master. Others believe that trading is the way to quick riches. They might be both wrong. What is important to know that no matter how experienced you are, mistakes will be part of the trading process.

Strategy

Money Management

Psychology