Ready to retire? Featured

7:00pm EDT November 25, 2008

When Wall Street is going gang-busters, even the most conservative investors loosen up and take on more risk in their portfolios than usual. Confident in the market and riding the “good times,” they forget the golden rules of investing.

“The fundamentals of investing are to diversify and balance your risk,” says Craig Johnson, president and CEO, Franklin Bank, Southfield, Mich. “I think a lot of people forgot those fundamentals when the stock market was so good.”

Every employee with a retirement plan is watching his or her savings erode, though long-term investors — which is anyone in the market for five years or longer — will see the market rebound eventually. For some, the current economy is a hard-learned lesson in being prudent in good times and bad. But regardless of one’s financial position, news headlines are sparking serious concern for retirement dollars.

As employees consider their 401(k) contributions and re-evaluate investment portfolios for fiscal 2009, business owners can do a great service by offering education and access to financial advisers who can provide practical retirement planning insight.

Smart Business spoke to Johnson about what employers should communicate to their staff concerning retirement plans and the investment alternatives that banks offer.

What should employees understand about their company 401(k) plans in light of Wall Street’s volatility?

As an employer, you have employees who contribute to a company 401(k) plan, and they are afraid because they see their money evaporating. Some may be tempted to stop participating in the program or to decrease their contribution level. Explain to employees that neither is a wise, long-term investment decision. Here’s why. A 401(k) plan offers two features not available anyplace else. One is tax savings. Contributions to a 401(k) are not subject to federal income tax upon deposit. There is no bank mutual fund or credit unit that will provide that instant return on your investment. Two, most employers match a certain percentage of employees’ 401(k) contributions. Because of this, a 401(k) is probably the most lucrative, long-term investments out there. Finally, by contributing to a 401(k), employees essentially are buying in to the stock market. You know the old saying, ‘Buy low, sell high.’ Now is the time to buy — everything is on sale.

What about pre-retirees who are considering pulling all funds from their retirement accounts?

One of the biggest mistakes people make near retirement age is getting too conservative with their plans, thereby limiting their returns. The goal is to not outlive your money. Pulling funds from an investment account to invest in a low-interest CD, for instance, may feel ‘safe,’ but what’s safer? Taking a little risk and maintaining higher returns for longer or cashing out of the market with the reality that the money will dry up in less time? Individuals are asking bankers about rolling retirement funds into CDs because they get FDIC insurance and avoid stock market volatility. Make sure this decision is not based on the events of the day. Stop and count to 10. Make rational decisions, not emotional ones.

Are there alternative bank products or other retirement savings vehicles that satisfy those with low risk tolerances?

An individual might consider a bank CD for a portion of savings, though exiting from the market completely is not a sound, long-term decision. An honest discussion with a financial adviser should preface discussion with a banker concerning savings products and mutual funds. Some banks provide wealth management services; take advantage of those offerings. Ask about annuity products. Traditionally offered by insurance companies, these products have evolved over the years. Wealth managers are offering them as an option for individuals who want more risk protection and ‘upside’ opportunity. Also, companies can attach a Roth 401(k) feature to their 401(k) plans. Unlike traditional Roth IRAs, with the Roth 401(k), employees can contribute up to $15,500 if they are under the age of 50. That money grows tax-deferred and is tax-free at retirement.

What education can managers provide employees to help them make wise, long-term fiscal decisions concerning retirement plans?

Employers can ease concerns about participating in company retirement plans by connecting their work force to experienced bankers and advisers. Let employees know that the company is partnered with a financial institution and team of advisers. Now is a great time to invite a professional to speak about the market, retirement planning and the importance of thinking long term. Most financial advisers partnered with retirement plan providers or banks will give presentations and consult with employees for free. Arrange a mandatory meeting at your business, and allow employees to sign up for one-on-one sessions after the talk. The confidence employees gain through education will help them make wise investment and banking decisions.

CRAIG JOHNSON is president and CEO of Franklin Bank, Southfield, Mich. Reach him at CLJohnson@franklinbank.com or (248) 358-6459.