Over the long haul, the investments on which defined benefit pensions rest have done much better than the investments that make up 401(k) plans.
The reasons are, in part, beyond our control. Most of us don't have the investment skills that the professionals who manage conventional pensions do. Plus, there is at least one more layer of expense tacked on most defined contribution plans and the expenses start out higher than the fees institutional investors pay because they manage such huge pools of money.
But, there are some factors that we retirement savers can manage. Alan Glickstein, senior retirement consultant for Towers Watson, offers this advice:
- Don't try to time the market. Stick to a strategic asset allocation and rebalance only when necessary. If your plan offers an automatic rebalancing feature, take advantage of it.
- Consider target-date funds. Well-managed target-date funds operate similarly to the way defined benefit plan managers do. In the early years, your money is invested more aggressively than it is as you get closer to retirement. "It is a set-it-and-forget-it approach that plays well in a volatile investment environment," Glickstein says.
- Don't experiment with your money. The buy-low-sell-high approach to investment only works if you know what you are doing. Over the long haul, amateur investors will get creamed if they do a lot of buying and selling.
- Read the manual. Employers can't tell you what to buy, but they can -- and most do -- offer lots of documentation and information along with your quarterly statement. Spend time actually reading the stuff instead of shoving it to the back of the drawer.
- Consider your personal risk tolerance. Your 401(k) is going to be an important part of your retirement. If you think about that and all of a sudden the highly volatile fund you've put all your savings in makes you queasy, then follow your gut and move some of your money into safer places.
- Stop checking your 401(k) daily. That is a sure path to inconsistency, an enemy of long-term investment. As Glickstein says, "There's a happy medium between not even looking at your statement and hoping things turn out all right and obsessing over it. Don't readjust your thinking every time you get a statement."
- Keep saving. Consistent savings is the most important piece of retirement planning advice anyone can offer.