Feeling pinched? It's no time to crack the nest egg.

Resist the urge to panic, say pros, and keep on investing for retirement.

from the August 18, 2008 edition

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According to Hewitt Associates' research, 43 percent of companies offered online third-party advisory investment services last year, and among those that didn't, 47 percent planned to offer them this year.

Tapping such wisdom can pay off handsomely. Consider the results of Charles Schwab Corp.'s three-year study on the results of advice provided to participants in 401(k) plans it administered: Over the 2005-07 period, those seeking – and taking – Schwab's advice about 401(k) savings and investments averaged a 10.2 percent annualized return on investments.

That exceeded the comparable 7.8 percent gain of those who did not seek Schwab's advice. In addition, plan participants on average doubled their 401(k) savings after getting advice, reports Catherine Miller, Schwab's vice president of 401(k) advice and education.

…and three Don'ts:

•Don't hold large amounts of your employer's stock. To ensure adequate diversification, limit company stock to no more than 10 percent of your retirement assets. And if your employer matches your contributions with its company stock, sell those shares and put the money to other asset classes in your retirement plan. (Data show that most companies that match your contributions with company stock allow you to do that redistribution immediately.)

•Don't cash out your 401(k) when leaving a job. According to Hewitt Associates, 45 percent of workers exiting their jobs do just that.

With some exceptions, workers younger than 59-1/2 face a 10 percent penalty, along with the income taxes owed on the account's value. Moreover, those cashing out early rob themselves of investment earnings and compounded returns the assets would have garnered had they remained in a retirement plan.

•Be wary of the 401(k) debit card. For the past five years, Reserve Solutions has been offering ReservePlus, an automated 401(k) loan process that some observers call the 401(k) debit card.

ReservePlus works this way: If approved by their employer, a 401(k) plan participant would sign up for the approved loan on the website of their plan's third-party administrator or of Reserve Solutions and receive checks and a debit card.

The loan amount goes into a separate account (invested in a money-market account), which the employee accesses via the checks or the debit card. The employee is then billed monthly for purchases with this money.

Eventually, the borrower repays the loan's principal and much of the interest to his 401(k) account. (The remaining portion of the interest goes to Reserve Solutions.)

Some of the concerns about the system: Taking even short-term loans from a retirement plan can leave a lasting dent in a nest egg. Moreover, depending on the structure of the 401(k) plan, involved fees can "make this the most expensive way to take out a loan from a 401(k) plan," says John Gannon, senior vice president for investor education at the not-for-profit Financial Industry Regulatory Authority.

Mr. Gannon sees more repayment risk with this card than with traditional 401(k) loans that are repaid via payroll deduction. With the 401(k) debit card, the borrower makes monthly payments on amounts spent with this card.

If the borrower misses payments for three consecutive months – or doesn't repay the loan generally within five years – the loan could be considered a withdrawal from the retirement account, incurring income taxes and a penalty, Gannon explains.

But Reserve Solutions officials paint a different picture. Far from detrimental, they say the ReservePlus system, now used by 18,000 US employees, boosts 401(k) plan participation and contribution rates.

"Many lower-paid or younger workers have hesitated to put money in the plans because they haven't wanted to lose access to the funds. But when our program [began to be] offered, suddenly there was a huge interest in people participating in their 401(k) plan," says Bruce Bent, chairman of New York City-based Reserve Solutions.

And as for tapping retirement funds, Mr. Bent says that "very few people" – only 20 percent of 401(k) plan participants – "borrow against these assets. And they repay about 98 percent of what they borrow. With our program, people actually borrow 35 percent less money than with conventional 401(k) loans."

He also notes that "our loan default rate, of 4/10ths of 1 percent," matches that "of conventional 401(k) loans." As Bent sees it, "People act in their own best interest … and don't default on 401(k) loans."

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