Obama proposes to lift penalties for limited IRA, 401k, 403b withdrawals

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Obama proposes to lift penalties for limited IRA, 401k, 403b withdrawals
By Mike Rowan, eRollover.com

I was watching the Presidential debate last night and heard Barack Obama mention that he would implement a plan where individuals would have access to some of their 401k, IRA, 403b, or 457 Plan money, penalty free. This would help them to have access to some funds during this financial crisis. I think that this is actually a pretty good idea, even though I am not an Obama supporter. However, I would like to see him also come up with a plan where they could get this money back in their 401k or other retirement plan as well. It is well known that the tax deferred retirement plans, such as a 401k or 403b, are the best way to accumulate wealth for retirement. Here is an excerpt from an article that I googled this morning that lays out the details of his plan.

Here is the Article

Democrat Barack Obama is proposing lifting penalties for withdrawals of up to $10,000 from retirement accounts, such as 401k, 403b, and 457 plans, and imposing a 90-day moratorium on foreclosures on some homeowners as part of a plan to boost the economy and aid middle-income taxpayers.

The economic crisis is dominating the presidential campaign, and polls show voters are favoring Obama over Republican candidate John McCain to deal with it. The Illinois senator has opened a 10-percentage point lead over McCain, 53 percent to 43 percent, among likely voters nationally in a Washington Post-ABC News poll taken Oct. 8-11. That’s up from a 4-point lead in a Post-ABC poll taken at the end of September.

Foreclosures
The foreclosure moratorium would apply to banks that are getting capital through the $700 billion rescue plan approved by Congress. It would impose a 90-day ban on foreclosures on homeowners who are trying to keep current on their mortgages.
Obama, 47, calls for a lending facility for states and localities that are having trouble borrowing.
Obama, 47, endorsed a proposal by McCain to suspend rules requiring retirees to begin liquidating Individual Retirement Accounts and 401(k)s at age 70 1/2 to avoid selling assets while markets are down. He would expand it to allow withdrawals of up to 15 percent, with a maximum of $10,000, without facing the tax penalties such withdrawals usually carry.

He also endorsed suspending taxes on unemployment insurance benefits.

McCain, an Arizona senator, held a rally in Virginia Beach this morning along with running mate Sarah Palin, the governor of Alaska. He portrayed himself as the underdog in the contest and emphasized his experience.
“The next president won’t have time to get used to the office,” McCain, 72, said. “He will have to act immediately.”
McCain didn’t present any new proposals on the economy. He repeated his plan to buy up troubled home loans as a way to help beleaguered borrowers.

“I’m not going to spend $700 billion of your money just bailing out the Wall Street bankers and brokers who got us into this mess,” McCain said. “I’m going to spend a lot of that money to bring relief to you, and I’m not going to wait 60 days to start doing it.”

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What is a “401k ROLLOVER into an IRA”?

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by Mike Rowan www.Erollover.com 2008

What is a “401k ROLLOVER into an IRA”?

Generally, after a person leaves the employment of a company, they are given the
option to roll their 401K or other plans into a new company’s plans, if available, or into
a Rollover IRA.

Frequently, the choice is made to roll into an IRA because of the flexibility and vast array
of investment choices available. Once in an IRA, the owner is no longer restricted to the
investment choices offered by their employer plan, nor is the participant subject to any
potential future restrictions imposed by the new employer, if any.

Most retirement plans can be easily rolled into either a variety of mutual funds, stocks,
bonds within a roth IRA, rollover IRA, or existing contributory IRA account, provided that you have separated service with the company where the plan is held.

However, there may be some costs to do this, as well as other ongoing expenses that
should be considered as well. In addition, there may be surrender charges when you want to move
some or part of your money as well. Check with your Financial Advisor and read the
prospectus regarding any investments you might be considering to insure that you aren’t hit with any type of penalty or fee.

What are your OPTIONS when dealing with former 401k plans?

1. You can move/rollover, all or PART, of your 401k into a rollover IRA account.

2. You can move/rollover, all or PART, of your 401k into your next employer’s 401k or retirement plan.

3. You can move/rollover, all or PART, of your 401k into a Roth IRA if you are in an income bracket that will be able to let you do so.

4. You can leave the funds with your past employer’s plan.

5. You can do any of the above while taking a full or partial distribution from your plan. Please keep in mind that this will trigger a taxable event of your income tax bracket, plus a 10% early withdrawal penalty on the amount that is taken.

NOTE: Most 401k plan administrators do NOT allow partial rollovers. It’s all or nothing
in most cases. However, if you want to move your retirement money into more than one
place, please contact a qualified advisor to assist you with this transaction.

There are virtually unlimited numbers of possible combinations. It takes the
experience of a knowledgeable Financial Advisor to know what is best in each particular
scenario. Everyone is different and so are their needs and desires! Please log onto our site at www.erollover.com to find an advisor or service that can cater directly to your needs.

We also go further in depth on our blog and site with regard to the types of investments available, and which ones may suit you best. Please read the following article, Mutual Funds vs. Stocks, EFT’s, and Bonds, to get a better feel for these vehicles, and which may be best for your situation.

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I started contributing to my 401k-Now What?

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I started contributing to my 401k-Now What?

By Mike Rowan for www.Erollover.com 2008

“My company matches 50 cents for every dollar I put into my 401(k). I just started this year and have a balance of about $1,200. I know nothing about investing, however. So what should I invest in to increase my account balance?” –Real Client

First, let me congratulate you for taking the single most important step in planning for your retirement: signing up for your 401(k) plan. Unfortunately, many people don’t see their 401k or IRA plans as an urgent priority, choosing instead to live for the moment.
That’s especially true among young workers. A recent survey by Hewitt Associates found that almost 70 percent of Generation Y workers (those 18 to 25 years old) don’t bother to contribute. Retirement for these individuals is 30 or 40 years away, which is extremely hard to fathom in some cases. Many times this potential retirement money is spent on depreciating assets, like nice cars and the like.

Whatever the reason, missing out on the chance to save through a 401(k) is a big mistake, especially when your employer is kicking in matching bucks. I mean, it’s not often you have someone giving you free money.

So now that you’ve taken that big first step, how do you tend to maximize the benefits of your 401k or retirement plan? Understandably, you’ve probably immediately turned your attention to investing. After all, the higher the return you earn on your contributions (and your employer’s match), the larger your nest egg will be come retirement time.

Contribute first, invest later
But as important as smart investing is in building your 401(k)’s balance over the long term, before you turn your attention to that front there’s something else you want to be sure you’re doing-namely, contributing as much as you possibly can.
That’s right, although we tend to concentrate our efforts to the investing side of the equation, the fact is when it comes to surefire ways of boosting your balance, shoveling in more money has a much bigger (and more certain) effect than savvy investing.

A study done by Putnam Investments last year illustrated this point very well. Basically, Putnam created a hypothetical “Average Joe,” who began participating in his 401(k) at age 28 in 1990, but got off on the wrong foot. He contributed very little, invested too little of his account in stock funds and he also chose funds that didn’t perform very well. The study then compared how Joe would have fared over the next 25 years had he made certain moves, namely: boosting the percentage of pay that he saved, increasing his exposure to stocks and choosing better-performing funds.

The study found that while Joe certainly would have boosted his 401(k) balance by picking better funds and tilting his portfolio mix more toward stocks, the gains from those two moves didn’t come close to the increase Joe would see if he dramatically boosted the amount he saved-even if he remained invested in underperforming funds.
The moral: if you really want to increase your 401(k)’s balance, you should first make sure you’re contributing as much as you possibly can to your account. At the very least, you want to contribute enough to take full advantage of your employer’s match. But beyond that you ought to try to contribute as much as your plan allows.

Picking the right mix
Once you’re saving to the max, you can then concentrate on the investing part. Here your first priority is to make sure you’re divvying up your portfolio properly between stocks and bonds.
A variety of studies show that your asset allocation - the mix between stock and bonds - is what largely determines the performance of your investment portfolio. The more you have in stocks, the higher your returns are likely to be over the long term.
So why not throw the whole shebang in stock funds? Well, for one thing you can never be absolutely sure that future performance will repeat the past, so it pays to hedge your bets. And besides, the more stocks you own in your 401(k), the bigger the hit your account will take during market downturns. If you devote too much to stocks, a big loss might frighten you out of stocks completely, undermining your long-term strategy.
To arrive at a mix that’s appropriate for you, you can check out our Asset Allocator.

As for specific investments in your 401(k), you’re limited to the menu of funds that your employer provides. (This is also a great reason to always roll your 401k into a self directed IRA if you were ever to switch jobs.) Ideally, you want to choose funds that have low costs, decent track records and a history of treating shareholders decently. Index funds are also almost always a good bet. Their costs are typically low and since they’re designed to mirror a particular market index or benchmark, you know exactly what you’re getting.

We have outlined some basic steps and strategies for your 401k, IRA, or retirement plan. While no course of action is absolutely bullet-proof, at least making an aggressive effort to contribute early and often should set you in the most advantageous path.

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To People Who Want to Quit Work Someday

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To People Who Want to Quit Work Someday

By Mike Rowan for www.Erollover.com 2008

How old are you today? Have you started investing in a 401k, Roth IRA, or Savings Plan? Have you ever thought about when you will retire, and how to afford your life when you reach retirement age? If you really want to quit work someday and enjoy a high standard of living when you retire, please give the following some thought!

What are you waiting for?
Some people do not even want to think about retirement or 401k plans today. It is very easy to live in the now, and to ignore the fact that retirement will be here before they know it. Some people would say, ‘I am still young, why should I think about my future or retirement today?’ Well, it is very true that nobody knows what will happen tomorrow. If you have chance to plan your future earlier with a chance of getting a better retirement, why do not you start from now? Which one do you prefer, an enjoyable retirement, free from worry, or would you rather spend your golden years scrutinizing every penny that you have earned?

Start Saving!
I emphasize saving for two reasons. One is that it’s essential. No saving, no retirement. It’s that simple. And the sooner you get into the habit of regular saving, the better your chances of being able to retire in comfort.
That being said, I agree that some advisers and financial planners can get too strict. They create the impression that unless you’re salting away most of your salary you’re a spendthrift. Sure, contributing to 401(k)s and other retirement accounts is crucial. But you don’t want to go through life feeling guilty every time you treat yourself to dinner at a decent restaurant.
I mean, you do have a life to live before retirement. And what’s the point of retiring in comfort if you lived a pinched existence during your career? What’ll you do in your dotage? Reminisce about how much fun it was to forego family vacations so you could boost your 401(k) contribution rate yet another percentage point?
Clearly, retirement planning has got to strike a balance. You want to save enough so you’ll be able to enjoy retirement. But not so much that you can’t also live a satisfying life during your career.

Just try to live below your means!
I think the best way to achieve that balance is to adjust your expectations so that you’re content living a little bit below your means. Let’s say your salary is high enough that you can buy a Mercedes, but doing so would require you to spend every cent you make. Well, maybe you decide to go with a moderately priced Toyota instead so you have some dough left over that you can plow into retirement savings.
It’s that sort of reasonable compromise you want to shoot for in retirement planning, whether it’s choosing a car or a home, planning vacations or whatever.

Don’t go to extremes with your financial life!
Try to avoid going to the extreme end of anything in your financial life. If you try to live like a millionaire while making 30k a year, rest assured that this lifestyle will have consequences in the future. Rather, you want to make choices that will allow you to live comfortably, but not extravagantly during your career, which should also allow you retire without having to ratchet down your standard of living.

Mike Rowan is the co-founder of erollover.com, based in Atlanta.

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Five professional tools to see how the funds in your 401(k) measure up

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Five professional tools to see how the funds in your 401(k) measure up
By Jonathan Burton, CBSMarketWatch

How good are the mutual funds in your 401(k)?
It would be nice if there were a scorecard. But rating the investments you hope will glitter in your golden years can be confusing. That’s one reason why so many investors have embraced so-called target-date or life-cycle funds, which take care of the guesswork.
Those who still want to pick their own 401(k) investment lineup often don’t know how, or where, to start. So they wind up defaulting to funds with the best track records.

That’s not strategy, it’s performance chasing — buying high and selling low — and it leads investors nowhere, says David B. Armstrong, managing director at Monument Wealth Management in Alexandria, Va.
“They’re picking mutual funds that have been doing very well and not giving proper consideration to the appropriate allocation,” he says.
To tell which stock funds in your retirement account are right for you, look beyond performance. Take a page from the methods investment experts likely used for your own company’s 401(k) plan. Here are five things to keep in mind:

Watch the Video Here!!!

1. Expenses
In many cases, 401(k) plans offer one actively managed fund and one indexed alternative. Since indexed management is usually cheaper, make sure you’re getting your money’s worth from an actively run choice.
Costs matter. An index fund that charges one-tenth of a percentage point in yearly management fees, for example, has a full percentage point head-start over a fund that takes 1.1%. Accordingly, the manager of the more expensive portfolio has a steep hurdle in order to deliver above-average returns over time. Don’t pay top dollar for mediocre results.

2. Risk-adjusted return
You can’t judge a fund by its advertised performance.
Understand the risks a manager took to generate those returns. Maybe the fund loaded up on a hot stock or market sector, or the manager traded frequently, playing the market’s momentum.
Otherwise, you run a risk too — that you’ll fork over good money to a fund that exposed you to more volatility that you can comfortably handle.
“Big stakes in any one sector is good reason to dig deeper,” says Christine Benz, director of personal finance at investment researcher Morningstar Inc. “How does that fit with the manager’s strategy, and how has that played out for the fund?”
One key measure of a fund’s risk-adjusted return is a technical term called standard deviation. It shows how much a fund’s performance varies, or deviates, from its expected normal return.
You won’t need a slide rule. Web sites such as Morningstar.com do the math for you. Click on “Risk Measures”: The bigger the number, the more risky the fund.
So if Fund A gained 11% with a standard deviation of 18, and Fund B rose 10% with a standard deviation of 12, then Fund B achieved almost the same results with two-thirds of the volatility and would have a better risk-adjusted return.
“Standard deviation can help you see which fund has had higher volatility and has probably been taking more risks,”

3. Results versus peers
You also want to look at a fund’s performance relative to its category. Investors frequently make the mistake of comparing funds to “the market,” which usually means the benchmark Standard & Poor’s 500 Index (SPX:
S&P 500 Index
But the S&P 500 is a large-company U.S. stock index. The only funds to rate against it are large-cap U.S. stock funds; anything else is simply misplaced. A small-cap stock fund may look great compared to the S&P 500, but it may have underperformed the more fitting Russell 2000 Index benchmark. Similarly, an international small-cap stock fund has no business in the same pool as its U.S. small-cap counterpart.
Again, Morningstar.com makes this information readily available. Click on “Total Returns” to see how a fund stacks up in its category.
Be sure that all of your fund choices are related, says Armstrong, the Virginia financial adviser. If they’re not, “you really can’t determine if the portfolio manager is doing a good job” or if you should just buy an index fund.

4. Portfolio yield
Performance-chasing is bad enough, but investors also reach for yield — the dividend income that can provide a cushion in difficult markets.
“I’ve seen clients get stars in their eyes over a high yield,” Armstrong says. They forget there’s a reason for this excess payout — and not always a good one.
Beware of a fund with a yield that’s out of synch with its peers. Maybe the high yield comes from a heavy dose of financial-services stocks or lower-quality investments. In that case, not only is the yield shaky — some banks have cut or eliminated their dividends, for example — but even the most generous dividend won’t offset major declines.

5. Manager tenure
The big consulting firms that cobble 401(k) plans together grow cautious when a fund switches managers, and you should too.
Fund companies will protest to the contrary, but new managers are game-changers. While the fund’s investment style might not be drastically altered — and if it is you have another problem — you can bet the portfolio itself will get a makeover.
If a fund manager has been on the job for only a year, then the fund’s three- and five-year performance belong mostly to someone else. You can be more charitable when a new manager is a veteran who has experienced bull and bear market cycles. On the other hand, if a longtime manager is retiring soon, find out when the junior managers joined the fund.
Says Lou Stanasolovich, president of Legend Financial Advisors in Pittsburgh.: “If a manager changes, you’re in effect starting a new fund.”

Jonathan Burton is an assistant personal finance editor for MarketWatch, based in San Francisco.

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New Job? The 401k Options that you must know!

By Mike Rowan, www.Erollover.com 2008

Congratulations! You have taken the plunge and have taken that new job that you have sought over for so long! Then, all of the sudden, you think of your 401k and may wonder, “What on Earth am I supposed to do?”.

There are many options for your existing 401k or retirement plan when you change jobs. For the most part, it opens up many options with regards to moving your plan and customizing it according to your individual retirement goals and needs. However, there are several 401k stipulations with which an investor must be very aware. If not followed exactly, it could possibly result in some major penalties for your 401k or retirement plan.

401k Rollover Options :

1. Rollover your 401k over into a personal retirement account (IRA)
2. Leave your 401k with your current employer
3. Rollover all or a portion of your 401k to your new employer
4. Take a full or partial withdrawal

Roll your 401k over into a personal retirement account (IRA).

Advantages :
Gain full control of your retirement plan
Gain full control of your investment options
Access to fully customizable asset allocation models
Easy and inexpensive access to professional investment advice
Flexibility in executing your decisions

Disadvantages :
None

Leave your 401k with your current employer: Rules and limitations apply depending on your employers specific retirement savings plan rules.

Advantages :
Convenience

Disadvantages :
Current employer retains control over your investment options.
You may not have access to the investment vehicles appropriate for you.
Limited access to professional investment advice.

Roll over all or a portion of your 401k to your new employer. Rules and limitations apply depending on your new employers specific retirement savings plan rules.

Advantages :
None

Disadvantages
New employer gains control over your investment options.
You may not have access to the investment vehicles appropriate for you.
Limited access to professional investment advice.
Continues circle of having to roll over accounts as you change jobs.

Take a full or partial withdrawal with the check payable to you. Beware of withdrawing money from your retirement savings plan account because you will owe current income taxes on the eligible portion of your withdrawal. In addition, if you take the withdrawal before age 59 1/2, you may also owe an additional 10 percent early withdrawal penalty.

Advantages
Instant access to a small portion of your funds.

Disadvantages
Taxes are payable, either 20 % instantly through withholding or Income taxes.
10 % penalty tax will apply to most withdrawals before age 59 ½
Your financial independence might be in jeopardy.

As you can tell, rolling over your 401k, 403b, or retirement plan, can be either the best or worst thing that you did for your retirement planning. Generally, moving your 401k to an IRA tends to be the most favorable action. However, as previously stated, you must know the 401k guidelines, or you may face severe penalties!

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Great 401k Help!

www.Erollover.com 2008

401(k) Help

By: Jo Ann Brown

People are saving more in their 401(k) plan as a result of the automated enrollment efforts initiated by their employer. Workers under thirty continue missing out on the free money given away by their employers. People are investing solely in their company's stock. Today, these stories make headlines and continue to prove that employees need help.

Studies have shown investors, when asked whether their company's stock or the S&P 500 is more risky, consistently point to the S&P 500. One of the reasons people have a lot of company stock is when you're looking at ten investment options, none of which you recognize, but you work for the company, familiarity makes it feel safer. Lower salaried workers also tend to rely on company stock.

Other staggering results show one-fourth of 401(k) participants closest to retirement (those sixty years old or older) invest more than half of their workplace retirement plan in their company stock. Some of those older workers take even bigger risks: 15 percent of sixty-year-old or older workers invest more than 80 percent of their portfolio in their company stock.

Real savers have budgets and have acquired good spending habits. Saving is a skill that has to be learned. People need to learn these skills and become better informed. Research articles on topics such as finding money to save and how to choose the right mutual fund.

It's obvious that people have issues and they need help with managing and investing money. People that know the value of saving are investing in the wrong products. Remember Enron? You should never invest more than 10 percent in your company stock. Follow these guidelines to help you gain control of your investments:

1. Contribute enough to get your employer's match.

2. If you're not sure of how to invest, consider a target fund that matches investments to your age or planned retirement date.

3. Read the article "What you need to know before you buy mutual funds."

4. Avoid taking hardship withdrawals or loans unless it's a dire emergency, such as bankruptcy.

5. Resist cashing out small accounts when you leave an employer. The money can be rolled into another employer's plan or an individual retirement account.

6. When rolling over accounts, try to get the money transferred from one trustee to another rather than taking a check. If you don't reinvest promptly in an IRA or another 401(k), you'll have to pay taxes on the money and you could pay a penalty as well.

You work hard for your money. Now make your money work hard for you. The companies no longer offer a pension plan and the 401(k) plan is the only option available in Corporate America to save for retirement.

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More about Jo Ann Brown

* I offer workshops and seminars. Email me at Jo Ann Brown - jb2brown@sbcglobal.net. My website address is www.jab401k.com I have the following blogs if you would like to see the articles I have written for various newspapers and magazines - 1. www.jabbooks.blogspot.com 2. www.joannbrown.blogspot.com 3. askjab.blog.com and 4. jab401k.blog.com You have to learn how to budget and manage money. It’s important to find the money to save as early as possible.

Saving Now instead of Saving Later

www.Erollover.com 2008

By Mike Rowan

Saving now vs. Saving later.

I speak with numerous young adults in their 20's who just are not too concerned about their 401k, IRA, or investment accounts. In their minds, their retirement is a long, long way away. While that may be true, the ability to retire will be much further away for each passing year that they neglect their 401k and IRA accounts.

Saving today is worth a lot more than saving later, and I can prove it. I am going to assume you are thinking about saving for retirement at age 65, and that you will invest well enough to get a return over the years of 10 percent annually.

FACT: Albert Einstein is widely regarded as one of the brightest people to ever walk the planet.

Albert Einstein once said compounding [interest] is the most powerful force in the universe.

Here is what he means:

If you save $100 when you are 25, at a growth rate of 10 percent your money will be worth $4,526 when you are 66. That's $45.26 for every dollar you save. If you wait until you're 30, you'll have $28.10 for every dollar you save. If you wait to age 40, your $1 will grow to only $10.83. Wait until you're 50? Forget it: $4.18.

Let's say you get a job and you can invest $4,000 a year. If you start at age 25 and put money in for only 10 years, stopping when you're 35, at a 10 percent rate of return you'll have $690,709 when you're 60. Your out-of-pocket cost: $40,000.

But if you wait until you're 35 to start putting away that $4,000 a year, you'll have to keep adding $4,000 every year until you're 60. Although you will have put in a total of $100,000 instead of $40,000, your account will be worth only $393,388.

Here is a prime example that 20 somethings give for not investing in their 401k or IRA.

I've finally got a job, and I work hard. I deserve to have some fun and get a cool car. I don't see why I should have to deny myself. Next year I'll get a raise, and then I can start saving for the future.

Carpe diem! Seize the day!!! Just understand that by neglecting your 401k, IRA, and retirement planning, you are setting up yourself for a lifetime of hard work instead of financial independence.

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5 Ways to Pick Mutual Fund Winners

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By Jonathan Burton



How good are the mutual funds in your 401(k)?

It would be nice if there were a scorecard. But rating the investments you hope will glitter in your golden years can be a confusing process. That’s one reason why so many investors have embraced so-called target-date or lifecycle funds, which take care of the guesswork.

Those who still want to pick their own 401(k) investment lineup often don’t know how, or where, to start. So they wind up defaulting to funds with the best track records.

That’s not strategy, it’s performance chasing — buying high and selling low — and it leads investors nowhere, says David B. Armstrong, managing director at Monument Wealth Management, in Alexandria, Va.

“They’re picking mutual funds that have been doing very well and not giving proper consideration to the appropriate allocation,” he says.

To tell which stock funds in your retirement account are right for you, look beyond performance. Take a page from the methods investment experts likely used for your own company’s 401(k) plan. Here are five things to keep in mind:

1. Expenses

In many cases, 401(k) plans offer one actively managed fund and one indexed alternative. Since indexed management is usually cheaper, make sure you’re getting your money’s worth from an actively run choice.

Costs matter. An index fund that charges one-tenth of a percentage point in yearly management fees, for example, has a full percentage point head start over a fund that takes 1.1%.

Accordingly, the manager of the more expensive portfolio has a steep hurdle to deliver above-average returns over time. Don’t pay top dollar for mediocre results.

“Every penny we can save on expenses is going to translate to better performance,” says Donald Trone, president of the Foundation for Fiduciary Studies, which educates investment advisers.

2. Risk-Adjusted Return

You can’t judge a fund by its advertised performance. Understand the risks a manager took to generate those returns — maybe the fund loaded up on a hot stock, or the manager traded frequently, playing the market’s momentum. Otherwise, you run a risk too — that you’ll fork over good money to a fund that exposed you to more volatility that you can comfortably handle.

“Big stakes in any one sector is good reason to dig deeper,” says Christine Benz, director of personal finance at investment researcher Morningstar. “How does that fit with the manager’s strategy, and how has that played out for the fund?”

One key measure of a fund’s risk-adjusted return is a technical term called standard deviation. It shows how much a fund’s performance varies, or deviates, from its expected return.

You won’t need a slide rule. Sites such as Morningstar.com do the math for you. Click on “Risk Measures.” The bigger the number, the more risky the fund. So if Fund A gained 11% with a standard deviation of 18, and Fund B rose 10% with a standard deviation of 12, then Fund B achieved almost the same results with two-thirds of the volatility and would have a better risk-adjusted return.

“Standard deviation can help you see which fund has had higher volatility and has probably been taking more risks,” Ms. Benz says.

3. Results vs. Peers

You also want to look at a fund’s performance relative to its category. Investors frequently make the mistake of comparing funds with “the market,” which usually means the benchmark Standard & Poor’s 500-stock index.

But the S&P 500 is a large-company U.S. stock index. The only funds to rate against it are large-cap U.S. stock funds; anything else is simply misplaced.

A small-cap stock fund may look great compared with the S&P 500, but it may have underperformed the more fitting Russell 2000 Index benchmark. Similarly, an international small-cap stock fund has no business in the same pool as its U.S. small-cap counterpart. Again, Morningstar.com makes this information readily available. Click on “Total Returns” to see how a fund stacks up in its category.

Be sure that all of your fund choices are related, says Mr. Armstrong, the Virginia financial adviser. If they’re not, “you really can’t determine if the portfolio manager is doing a good job” or if you should just buy an index fund.

4. Portfolio Yield

Performance-chasing is bad enough, but investors also reach for yield — the dividend income that can provide a cushion in difficult markets.

“I’ve seen clients get stars in their eyes over a high yield,” Mr. Armstrong says. They forget there’s a reason for this excess payout — and not always a good one.

Beware of a fund with a yield that’s out of synch with its peers. Maybe the high yield comes from a heavy dose of financial-services stocks or lower-quality investments. In that case, not only is the yield shaky — some banks have cut or eliminated their dividends, for example — but even the most generous dividend won’t offset major declines.

5. Manager Tenure

The big consulting firms that cobble 401(k) plans together grow cautious when a fund switches managers. And you should, too.

Fund companies will protest to the contrary, but new managers are game-changers. While the fund’s investment style might not be drastically altered, you can bet the portfolio itself will get a makeover.

If a fund manager has been on the job for only a year, then the fund’s three- and five-year performance isn’t his to boast about.

You can be more charitable when a new manager is a veteran who has experienced bull- and bear-market cycles.

Says Lou Stanasolovich, president of Legend Financial Advisors in Pittsburgh, Pa.: “If a manager changes, you’re in effect starting a new fund.”

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