What to do when the 401(k) match fizzles

Q: My employer notified me that the company will no longer contribute to my 401(k). Up to now, I have been investing 15 percent of my salary. The company matched up to 6 percent. Two questions:

1. Should I continue to put in 15 percent, lower the percentage, or take the money and move it to an IRA or mutual fund outside the company's choices (all Fidelity products)?

2. Currently I have 50 percent in the Fidelity Puritan Fund and 50 percent in the Magellan Fund. If I stay in the 401(k) program, should I shift the money entirely to one fund? Should I move into a bond fund? Do bond funds charge additional fees to invest them? Which Fidelity bond funds should I go into?

E.H., Bloomington, Ind.

A: "Stay with your 401(k) plan," says David Bendix, who heads up Bendix Financial Group, Garden City, N.Y.

Alas, you cannot shift 401(k) assets to an IRA without terminating your employment. Bottom line, "continue to max out your 401(k) contribution," Mr. Bendix says. Perhaps at some point your company match will be reinstated.

As for your current allocation: "Ideally, you should be contributing to more than one or two funds to ensure diversification," Bendix says. "Buy into a growth fund, a value fund, a large-cap fund, and a small-cap fund."

Bond mutual funds do not normally require a special charge or fee. They are treated like all other mutual funds. Bendix likes Fidelity's GNMA fund and intermediate-term bond fund. "But keep most of your account in equity funds, for growth."

Q: My investment adviser says that I should go into a small-cap fund, since they have done so well this year. But I see that there are two main types of small-cap funds, value funds and growth funds. Which type is best?

M.H., New York

A: It depends on the underlying economy. So far this year, small-cap value stocks have substantially outperformed small-cap growth funds, according to Lipper Inc.

But in the early stages of an economic recovery, which many economists believe will begin sometime in 2002, "small-cap growth stocks traditionally outperform small-cap value funds," says Terence McLaughlin, chief investment officer of financial firm Ashland Management, in New York. He suggests investors start to position themselves for the recovery now.

Questions about finances? Write:

Guy Halverson

The Christian Science Monitor

500 Fifth Ave., Suite 1845

New York, NY 10110

E-mail: halversong@csps.com