Clark Howard's Tips

New rules coming for 401(k) investments

October 24, 2007

There's a big change coming to the rules governing your 401(k) in January.

In the past, many people were passive in their investment strategy. They might enroll in a 401(k) and have the deductions taken from their paycheck, but they would be very hands-off when it came to deciding where to invest their money. So employers would automatically default the funds into stable value or guaranteed income funds.

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While these funds may sound good, they're really like puny savings accounts. You need to beat out inflation when you're planning for the future -- and parking it in savings is not the way to go.

Under the new rules, if you can't decide how to invest your money it will be put into the stock market unless you tell your employer otherwise. Clark knows that many people are reflexively afraid of the stock market. You can definitely get burned with stocks in the short run, but they're great for long term. Owning a business is one way to get ahead in life, and stocks allow you to own pieces of businesses.

When it comes to your 401(k), Clark really likes targeted-retirement portfolios. With these options, your money is put into various investments over the years based on your age and target retirement date. So when you're in your 20s and 30s, you might be heavily invested in stocks. As you reach your 40s, 50s and 60s, you'll be put into more conservative investments. That way you're able to make a lot of money early on and protect it as you get older.

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