This is a transcript of the April 2010 edition of K-Voice™, your 401(k) participant audio counselor.
Health care reform is now the law of the land. You might be asking yourself: what does that have to do with 401(k) plans? Nothing directly, but health care reform will bring forth a tidal wave of social and financial change that will impact your 401(k) plan.
You will pay more for your health insurance and healthcare in the future than you do today. More Americans may be insured, but the law creates disincentives for employers to continue sponsoring health plans and for health care providers to continue in practice. These effects will drive up premiums. As an individual, you will be required to pay for health coverage, or pay fines. You may have no choice but to reduce your retirement savings rate. If employers incur greater health care costs, they may be forced to reduce matching contributions to 401(k) plans. The Federal government will be looking for ways to finance healthcare. Three years ago a key member of Congress proposed ending the tax advantages of 401(k) plans. Now that healthcare reform has passed, they will turn their attention to finding sources of revenue – and 401(k) plans are high on their wish list.
With all this in mind, good investment performance is more critical than ever to the future growth of your 401(k) account. You must select investments that will strike a balance between growth and preservation of your benefits. This will not be an easy task. Many respected economists and investment managers are warning us to expect lower long-term investment returns on stocks and bonds than in past years. Bill Gross, PIMCO’s Chief Investment Officer and longtime manager of the PIMCO Total Return Fund, recently advised investors to expect 4 to 6 percent returns on risk assets instead of the historical 8 to 10 percent returns. During an interview on CNBC, Gross warned “(If you are) looking to send (your) children to college or retire on those types of returns, that’s going to be a stretch. You just have to reduce your expectations.”
This will make it even more difficult to grow 401(k) accounts in the future. So, good investment selection is a must! What to do? I will give you three practical suggestions. One, contribute as much as you can to your 401(k) before the new health care rules take effect. Two, review your investment allocations and elections regularly – are they right for you? Three, seek help from your plan’s investment consultant. You are already paying for it!