Americans should never turn away free money: Former SEC Director on 401k contributions

Norm Champ, Kirkland & Ellis LLP Senior Partner and Former SEC Director Division of Investment Management joins the On the Move panel to discuss the steps that individuals should take when preparing for a financial crisis.

Video Transcript

ADAM SHAPIRO: All right, in the 1970s, there was a song. And I think it was "Three Dog Night", "Spinning Wheel's" What goes up must come down-- appropriate when you're talking about these markets. The reason I bring that up is there's a new book out-- "Mastering Money: How to Beat Debt, Build Wealth, and Be Prepared for Any Financial Crisis." And the author is Norm Champ.

He's a partner at Kirkland & Ellis LLP. But he's also the former director of the Division of Investment Management at the US Securities and Exchange Commission. And excusing my failure to understand music history, I do want to ask you, how do we prepare during a financial crisis? Or, you know, we've all lived through the 2008 financial crisis. And here we are in a pandemic, which brought about another financial crisis. How do you get through these kinds of things when they're only supposed to happen at most once in a lifetime, and now it's twice?

NORM CHAMP: So we do have these periods where we have these crises periodically. And it's important to think about your finances in light of what could happen. So first thing, try to get spending down and increase savings, see if you can get out of debt. If you end up going into the crisis with an emergency fund on hand, that will help you survive much longer during a period of difficulty.

Most people recommend a six-month emergency fund, so having a fund available for six months of expenses. That's about the average time it takes someone who's unemployed to find a new job. Now, we may see a longer period here with the unemployment that we have currently. But those are some of the steps that people need to take to get ready for these crises.

ADAM SHAPIRO: Brian, I think you wanted to get in on this?

BRIAN CHEUNG: Hey, sorry about that, Norm. I was on mute-- wanted to ask about asset allocation right now. It seems like on this show, we have a lot of people talking about your portfolio for investing. But what should your ideal allocation look like? If you're just trying to preserve yourself right now given the concerns, is it getting into gold? Is it putting your money into a CD account with rates so low? What is the strategy or the advice, I guess, that you're giving people who are saying, I don't know what to do right now?

NORM CHAMP: So I think it's important in these crisis period to stay with your asset allocation that you had before the crisis. When I was at the Securities and Exchange Commission, every single study we did showed that retail investors tend to sell when markets are down. And then when confidence returns and markets are up, they tend to buy. That's not the way to make money.

The best thing is to put an asset allocation in place and try to ride it through the ups and downs. If you stay in the stock market long term, that's produced about an 11% annual return. But, of course, if you were out of the market for one year in that period, you don't get anything like that return.

So the simple one that many planners use-- take the number 100 or 125, subtract your age. And then that gives you your bond and stock split. If you're younger, so say from 100, you subtract 20, you should be 80% stocks, 20% bonds. Try to keep that steady allocation as you move forward, as you get older, increasing bonds, reducing stocks.

One thing I see people doing is reaching for investments, things like gold or other things that are hot-- very important to stay with the basics until you get to a certain level of net worth. After that point, maybe start taking some risk. But a simple stock/bond allocation that you ride through long term is a great strategy for growing your wealth.

ADAM SHAPIRO: Even in this environment where, you know, there's really very little return on the protection of a US treasury-- or even, you know, I know you like to talk about maybe buying a house as an investment. But you have to be careful not to get into a situation where you're actually going to be losing money. How do you protect money? Let's do it with the bonds. How do you protect money when you're getting bupkis on US treasury?

NORM CHAMP: So clearly very low yields. Now, that's driving stocks up. So your stock-- if you're in a standard stock/bond allocation, your stocks should be soaring right now. You know, the investors are pushed into stocks by low rates. However, if you want on the bond side of your portfolio, think about a simple trick. Corporate bonds enjoy no tax advantage on interest, right? The interest is 100% taxable.

So put some corporate bond funds into your 401(k) or other tax deferred account where you're not paying any tax on that interest. So you're getting much better yield. And I would-- treasuries for sure, obviously, almost zero. I probably stay away from those. Work on corporate bonds and in 401(k)s and tax-deferred accounts.

BRIAN CHEUNG: Norm, so it sounds like 401(k) might have a similar strategy to what you just outlined, which is kind of stay the course of whatever you are doing pre-crisis. But there are some people who are wondering, should they be maybe increasing the retirement account?

If it seems like crises are happening every eight to 10 years or so, maybe I should have a larger nest egg. What would you say to someone who is maybe floating that idea out there and how they maybe prioritize the percentage of their paycheck right now that's going towards retirement fund?

NORM CHAMP: Well, first things first. You have to maximize your contributions to your 401(k), in particular, to take advantage of any employer match. So the statistics are terrible. Number one, people don't maximize their 401(k) contribution. And a lot of times they're leaving the employer match on the table. It's free money. Never turn away free money.

So certainly maximize your contribution, get your employer match. Now, in your 401(k) account, you have just the ultimate luxury of tax deferral until age 70. So I do like corporate bonds in there, as I said, because they have no tax advantage. Stocks are good, as well, because they have a capital gains tax advantage. But it's limited, right?

So I think you do want to maximize your 401(k) for as long as you can. Try to avoid tapping it for loans and some of these things that have been made easier. It's not a winning long-term strategy. Anything tax deferred like that can give you tremendous compounding over decades.