This reader wants to know if I've heard anything about a big market drop next year, and if they can change their 401(k) without changing jobs.
This reader has two questions: one about the stock market, the other about their 401(k)…
Have you heard anything about a big drop again in the stock market in 2013? Also, I have a 401k where my employer matches up to $20 per pay period. I want to put my money into another 401k retirement company. Can I roll it over without changing jobs?
Here are your answers, Lorrian…
Have you heard anything about a big drop in stocks in 2013?
Yes, I have. I also heard about a big drop in the stock market in 2012, 2011, 2010, 2009… In fact, I can’t remember a year in which I didn’t hear predictions of doom and gloom for stocks.
The stock market is an auction. For every seller, there’s a buyer and for every buyer, a seller. Millions of times every trading day, someone is selling a stock, presumably because they think it will go down, and someone is buying that same stock, presumably because they’re convinced it’s going higher.
That means there’s always someone seeing the glass as half-full and someone else seeing it half-empty. Both will have logical arguments as to why, and strong opinions representing both sides will show up in the media. The challenge for every investor is to consider the arguments, then determine which makes most sense.
Since I long ago gave up on the idea of timing the market, however, what I do is always keep some money in stocks, but never all. That way, if the market goes up, I’m not left on the sidelines. If it goes down, I’ve kept some powder dry to buy at lower prices.
You’ll get similar advice by reading yesterday’s post 5 Lessons From the Stock Market Crash of 1987. And for a simple formula that will help you determine how much to put into stocks, check out Manage Your 401(k) in 1 Minute.
All that being said, is the market likely to drop in 2013? There are reasons it might.
The biggest potential peril is a radical increase in income taxes and decrease in government spending called the “fiscal cliff.” Without Congressional intervention, this will occur on Jan. 1, 2013. If this problem isn’t addressed, it will tip the economy into recession, and punish stocks in a major way.
And even if the fiscal cliff is avoided, the economy will probably still remain tepid through 2013. From this article in The Wall Street Journal…
In the Congressional Budget Offices’ view, avoiding the “fiscal cliff” results in real gross domestic product growth of only 1.7% between the fourth quarter of 2012 and the fourth quarter of 2013. And the unemployment rate would stand at an unhealthy 8% or so when 2013 comes to a close.
Then there’s Europe. As one of our largest trading partners, when they sneeze, our economy could catch a cold. And the economy there is already in a recession.
In conclusion, there are reasons to be less than excited about the prospect for stocks in 2013. But since there’s no way to ever know for sure what the future holds, do what I do: Keep some money in the market anyway.
Can you change a 401(k) without changing employers?
When Lorrian says, “I want to put my money into another 401(k) retirement company,” that signals a lack of understanding about what a 401(k) actually is.
A 401(k) is a company-sponsored retirement plan. Within that plan, participants are given the opportunity to choose among investment options offered by mutual funds or other companies that provide investments. In other words, the 401(k) plan you’re eligible for belongs to your employer. The investment choices within that plan are the ones chosen by your employer.
This distinction is important because there’s no such thing as a “401(k) retirement company.” The only way you can quit the 401(k) you’re in and join another is to quit the company you’re working for and join another.
You could roll your 401(k) plan into an IRA and pick the investments within the plan yourself, but again, that would also require leaving your current employer.
There is one other possibility. If your plan allows it, you could take what’s called an “in-service distribution.” As the name implies, this is a distribution from your current plan that you’d transfer to an IRA while still participating in your current plan and keeping your current job.
Not all plans allow in-service distributions, so you’d have to check with your employer or plan administrator to see if yours does. If your plan allows it, you’d probably still be faced with restrictions. For example, most plans only allow them for employees over the age of 59 1/2.
Lorrian doesn’t say why he wants to move to a new plan, but if the problem is performance, he’s better off switching between the available investment options to try to earn more or invest with greater safety. If the plan or investments are terrible, he could stop contributing to his company 401(k) and start funding his own IRA outside the company, but then he’ll forgo the employer match. And even though it’s only $20 per pay period, it’s still free money.