Poof Goes Your 401(k) Match


Poof Goes Your 401(k) Match

This month Kim highlights what to do when your employer freezes your 401(k) match, reviews the best fund newsletters and explains the concept of stable-value funds.

My company is no longer matching my 401(k) contributions. Can I roll my 401(k) money into an IRA? My company says I can do that only if I no longer work there. Jeff Newbolt, Moore, Okla.

Sorry, but most company plans don't allow you to roll over your 401(k) into an IRA while you're still employed at the company. But there may not be a reason to switch anyway -- an employer may discontinue its match but still offer attractive investment choices. And when business picks up, your company could reinstate its match.

Several major companies, including Eastman Kodak, General Motors, Motorola and Sears, have suspended their 401(k) match over the past few months. FedEx stopped matching 401(k) contributions as of February 1. And Starbucks announced that it will no longer guarantee its employees a 401(k) match.

Your priority is to boost your retirement-plan contributions, if you can, to make up for some or all of the loss of your employer match. Now is also a good time to reassess where to invest future contributions. We usually recommend that you contribute to your 401(k) at least up to the match before investing in an IRA. If you're satisfied with the investment choices in your 401(k) and your plan has low fees, stick with your company plan. You may contribute up to $16,500 in a 401(k) in 2009, and up to $22,000 if you're age 50 or older.

But if you don't like the selection of investments for your 401(k), consider an IRA. You can contribute up to $5,000 to a Roth IRA ($6,000 if 50 or older) if your income is $105,000 or less in 2009; or $166,000 or less if married filing jointly (you can make a partial contribution if you earn $120,000 or less; or $176,000 or less if married filing jointly). You won't get an upfront tax break as you do with your 401(k), but all the money you withdraw from your Roth IRA in retirement will be tax-free.

Best fund newsletters.
What newsletter or periodical can provide me with timely, reliable and accurate information on how to evaluate the stability and growth potential of mutual funds? -- P.B., Sacramento, Cal.


If your goal really is to learn how to evaluate funds, our favorite newsletter is No-Load Fund Analyst. Published monthly, it is one of the most thoughtful and sophisticated letters that specialize in funds. Editor Stephen Savage, aided by a team of seven researchers, writes about investment strategy and market perform-ance and offers four model portfolios.

But NLFA's greatest value comes from its in-depth fund analysis. Each issue carries lengthy articles on four or more funds. The pieces, often based on interviews with the fund managers, conclude with the letter's opinion.

Over the past ten years through December 31, according to the Hulbert Financial Digest, which tracks the performance of investment letters, NLFA's portfolios returned an annualized 3.1%, on average, beating Standard & Poor's 500-stock index by an average of 4.5 percentage points per year. But NLFA is no miracle worker. Its port-folios surrendered 33% on average last year. NLFA costs $600 for 12 monthly issues, but you can buy one issue for $50 (try a short-term trial or ask the letter to give you a single issue free before ponying up for a full subscription).

For some investors, NLFA may result in information overload. In that case, take a look at NoLoad FundX, a letter that uses a momentum strategy for picking funds and pays no attention whatsoever to who manages funds, how they manage them and what the funds charge for operating expenses. FundX's recommended portfolio gained 7.1% annualized over the past decade but lost 40% over the past year. The letter, which publishes two issues a month, charges $179 a year.


A break for retirees.
Is it true that those 701/2 and older will not be required to take IRA withdrawals? -- Victor Palacios, Staten Island, N.Y.

It's true -- but only for 2009. In light of last year's dramatic investment losses, Congress suspended the minimum distribution requirements for IRAs, 401(k)s and other retirement plans in 2009. However, people who turned 70 1/2 in 2008 will still need to make their 2008 withdrawals by April 1, 2009.

Generally, you must start taking required minimum distributions from your retirement plans after you reach age 70 1/2. (If you are still working, you don't have to tap your 401(k), but you still must make IRA withdrawals.) Annual withdrawal amounts are based on your life expectancy and traditional (not Roth) IRA or 401(k) balances as of December 31 of the previous year. You must pay taxes on the amount you withdraw, minus any nondeductible contributions.

Because you don't need to take a 2009 distribution, you could channel some of the money you had been planning to withdraw to a Roth IRA instead. You'll still have to pay taxes when you make the switch, but you can take tax-free withdrawals after five years, you never have to take required minimum distributions, and you can create a tax-free inheritance for your heirs.


You don't need earned income to convert a traditional IRA to a Roth; your adjusted gross income just needs to be less than $100,000. That income limit for conversions disappears in 2010.

Are stable-value funds safe?
I read that a stable-value fund that Invesco manages for Lehman Brothers' 401(k) plan lost money. How safe are other stable-value funds? -- E.U. via e-mail

It's true that an Invesco fund is the first stable-value fund ever to lose money. But the fund's 1.7% decline in December 2008 is peculiar to the situation at the now-bankrupt Lehman, and it probably doesn't portend broader troubles in stable-value funds, which hold more than $400 billion, almost entirely in retirement accounts.

Stable-value funds generally invest in high-quality bonds with maturities of two to three years. That is a conservative strategy. In addition, the funds buy insurance "wrappers" that guarantee the principal. But two developments after Lehman's abrupt bankruptcy in September undermined the stable-value fund in the company's retirement plan.


First, many former employees withdrew money from their 401(k)s, forcing the fund to sell bonds at a loss. In addition, contracts with three of the Lehman fund's seven insurers specified that their wrappers would become invalid in the event of bankruptcy.

Generally, stable-value funds negotiate new contracts in the case of a bankruptcy and maintain insurance coverage, but Lehman didn't have time to renegotiate the contracts. "It is difficult to imagine a worse case than what happened with Lehman," says David Babbel, professor emeritus at the University of Pennsylvania's Wharton School and author of a study on stable-value performance.

The average stable-value fund returned 4% in 2008. After the 1.7% hit in December, the Lehman fund gained 2.2% for all of 2008. An Invesco spokesman says that all of the fund's assets are now insured against loss and that the December write-down is likely to be a one-time event.

Forgotten money.
How can I find out if my state is holding any money for my mother in its unclaimed-property database? -- J.K., Madison, Wis.

States receive about $3 billion in unclaimed property every year -- primarily uncashed paychecks and dividend checks, unclaimed state-tax refunds, uncollected insurance benefits and utility deposits.

You can locate your state's unclaimed-property database through the National Association of Unclaimed Property Administrators' Web site. Or check the databases in 38 states through MissingMoney.com.

My thanks to Manny Schiffres for his help this month.

Got a question? Ask Kim. Kimberly Lankford is the author of Ask Kim for Money Smart Solutions (Kaplan, $18.95).