After two weeks of volatility in the stock market, and the potential for plenty more ahead, some unlikely winners may have emerged: The growing number of workers who have taken loans from their 401(k) plans recently.
For years, financial advisers have warned investors not to borrow money from their 401(k) plans, citing lost stock-market gains and the possibility of incurring steep taxes and fees. In many cases, those warnings went unheeded: About one in seven workers borrowed from a 401(k) plan in 2010, with many plans reporting double-digit increases in borrowing.
Conventional wisdom says it’s a bad idea to buy a lot of stock in the company that employs you. But what if it’s a screaming buy or seems like the safest choice.
That’s what a lot of rattled 401(k) investors are thinking. In the last few days, there has been a significant uptick in trading within 401(k) plans, including to company stock, according to consulting firm Aon Hewitt. Last Wednesday when the market tanked more than 500 points, two-thirds of the transfers in 401(k) plans it tracks went into company stock. So far in August, almost 17% of the assets traded in 401(k)s went into company stock. That may seem small, until you consider that from January through last week, 401(k) assets in company stock decreased by nearly 8% to $16.81 billion. “I think it’s opportunistic buying,” says Pam Hess, director of Aon Hewitt’s retirement research. “After a significant decline, there is a subset of people with larger balances who are moving into company stock.”
With many investors receiving their paychecks today and tomorrow, it’s a good time to ask: Do I have enough savings to handle another economic downturn? And if not, should I cut my 401(k) contribution rate to help shore up my emergency fund?
Of course, how you answer these questions depends largely on where your think this roller-coaster market is heading — the Dow was up more than 200 points this morning, after falling more than 500 points yesterday. But before you rush to make any changes, financial advisers recommend revisiting your monthly budget (or creating you if you haven’t already) to see if there are other ways to cut costs and increase your savings without reducing your contribution rates. If you do decide to make a change, ask your employer how to access your 401(k) account online and how many free adjustment you can make a year (the vary from employer to employer). After making the adjustment, check the correct amount has been deducted from your next paycheck.
As stocks keep falling, mutual fund investors looking to bail are out of luck. Unlike investors in individual stocks or exchange-traded funds — which can be bought and sold throughout the day at real-time prices — mutual fund trades don’t go through until after the market closes at 4 p.m. EST, with prices set at the day’s close. If, for example, you place an order to sell a mutual fund at noon, when the net asset value is $15, the trade won’t be executed until the end of the day at which point, the price could be higher or lower than when you pulled the trigger.
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