Take Control with Your 401. . - k - Bookshelf - book review

HR Magazine, Dec, 2002

By David L. Wray

Dearborn Trade Publications, 2002

210 pages

List Price: $18.95

ISBN: 0-7931-5411-1

With the ongoing flux in the stock market, employees are paying closer attention to their retirement fund investments. Take Control with Your 401(k) provides participants with a basis for understanding how 401(k), 403(b) and 457 retirement savings plans work and for creating effective investment strategies.

Written by David L. Wray, president of Chicago-based Profit Sharing/401(k) Council of America, the book reminds readers that the responsibility for managing their retirement funds rests with them, not their employers. When thinking about their retirement funds, participants should understand the differences between the basic types of investment vehicles, Wray says.

* Stocks. Stocks generate returns in two ways, Wray notes. First, the value of the stock can increase. Second, stocks can generate dividends, paid when companies realize profits. Stocks typically provide a higher rate of return than other investment vehicles. They also entail greater risk. However, if you have long-term investment goals, gains will outpace losses.

* Bonds. These are issued by government, corporations and financial institutions. The advantage of bonds: The principal is safe (unless a bond issuer goes into default). The disadvantage: Bonds have a lower rate of return than stocks (typically 6 percent, compared to 10 percent for stocks). Bonds also don't fare well when interest rates are low. "Bonds should not be the major component of a long-term investment program," writes Wray.

* Cash. Cash investments are completely safeguarded against loss of principal. However, because they have a low rate of return--around 3 percent, about the rate of inflation--only short-term investors should rely on them, writes Wray.

How employees allocate their retirement funds depends on how long they have until retirement. Workers who are 10 years or more away from retirement should emphasize accumulation--building funds through savings and aggressive investment. Those who plan to retire in five to 10 years should move toward investments with higher short-term yields. For those at or near retirement age, the best vehicles are those that can provide a steady stream of income.

Employers can provide plan participants with materials and seminars on investing strategies. However, at some point, all but the most sophisticated investors should seek the counsel of a financial planning professional, Wray writes.

In addition to providing a list of resources for finding planning professionals, Take Control with Your 401(k) includes a section on frequently asked questions about retirement planning, a glossary of investment terms and an overview of 401(k) provisions in the Economic Growth and Tax Relief Reconciliation Act of 2001. That law increased the amount of pre-tax income that could be set aside for retirement, increased the portability of 401(k) plans and eased administration burdens for employers.