All of us want sufficient income to live the type of retirement lifestyle we’ve envisioned. That’s why it’s so easy to empathize with those Enron employees who lost vast percentages of their 401(k) accounts. And if you have a 401(k), you may be asking yourself a rather chilling question: Could it happen to me?
Probably not. After all, the Enron case is an extreme example of what can go wrong with a 401(k). But you don’t want to stake your future on the word “probably.” Fortunately, there are steps you can take to help safeguard your 401(k).
And you won’t be totally alone. The Bush Administration and members of Congress have proposed legislation designed to help protect 401(k) investors in the future. Some of these laws would make it easier for employees to sell company stock in their 401(k) plans, while other changes would cap the amount of company stock that can be held in 401(k)s.
These and other proposals will be debated and go through the political process. Ultimately, some changes will likely be enacted, and they may be helpful to you. But you can’t depend on new laws alone to protect your 401(k) savings – you’ve got to take action on your own. And the best time to do that is right now.
To begin with, look at just how much company stock you have in your 401(k). Are your investment decisions being influenced too much by company loyalty? If so, you’re not alone: Almost 30 percent of the $71 billion in assets in 1.5 million 401(k) plans are invested in company stock, according to a 2001 study by benefits consulting firm Hewitt Associates. And the figure is much higher at some firms: In pre-crash Enron, about 62 percent of individuals’ 401(k) assets were invested in Enron stock.
Even if your company is doing well, it’s still not a good idea to overweight your 401(k) plan with company stock. Reversals of fortune can happen quickly in the business world, and if just one stock dominates your 401(k) portfolio, you’re taking on too large a risk, particularly if you’re nearing retirement.
That’s why it’s essential that you diversify your 401(k) investments. Spread your contributions among the various accounts available in your 401(k) plan: growth, growth-and-income, bonds, money market, government securities, etc. By diversifying your 401(k) dollars, you’ll expand your opportunities for success, while reducing the possibility that you’ll be hurt by downturns affecting just one type of asset – such as your company stock.
Thus far, we’ve only talked about the contributions that you make to your 401(k). If you’re lucky, your employer will also match your contributions, up to a certain point. And many employers make these matches with company stock – which gives you even more incentive to put your contributions into the various other options. Your goal should again be diversification. If, for example, your company stock is considered a “growth” stock, then you may want to spread your other 401(k) dollars among the other types of asset classes available.
Your employer is the source of your current income. But when it comes to accumulating retirement funds in your 401(k), you need to look beyond the confines of your company. So start diversifying today – it’s your best chance for long-term success.
-This article is provided by Jeff Foster, the Edward Jones Investment Representative for Seymour, TN.

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