Retirement planning is ultimately your responsibility, so take a hands-on approach

By Eileen Ambrose  |  April 14, 2007

With so many workers failing to manage the do-it-yourself 401(k) retirement plan, employers increasingly are becoming more hands on.

Some automatically enroll employees instead of waiting for them to sign up. Many supply workers with advice or have added no-fuss funds to take the guesswork out of investing. Others offer retiring workers the option of buying an annuity with 401(k) money so they have an income stream for life, as with a traditional pension.

"If you do everything right, you could have a lot of money and could have a good retirement," says Robyn Credico of benefits consultant Watson Wyatt Worldwide. "The problem is most people don't do everything right or can't afford to do everything right."

The statistics are disturbing. The 401(k) has been around for a quarter century, and savings aren't what they should be, experts say.

The Center for Retirement Research at Boston College figured that the typical worker at age 50 should have $169,300 in a 401(k). This assumes he contributed 6 percent of pay each year on top of a 3 percent employer match. In reality, workers age 45 to 54 on average accumulated $49,000, based on 2004 figures.

Workers have little control over some pitfalls. The last bear market burned many people near retirement. Some employers temporarily suspend matching contributions when the economy sours.

But often workers' own behavior works against them.

About one-third of workers don't participate in their employer's 401(k), and 20 percent don't contribute enough to get the full employer match, reports benefits consultant Hewitt Associates. Workers might not have the time or know-how to invest wisely. And they use their 401(k) as a loan fund or cash out when changing jobs, instead of building their savings.

If you have access to a 401(k), here's how to make the most of the plan now:

Participate. Automatic enrollment dramatically increases worker participation, but don't wait for an employer to sign you up. The earlier you enroll the better. Saving even small sums in your 20s will be beneficial and a lot easier than playing catch-up in your 40s or 50s.

If money is tight, contribute at least enough to get the company match. Raise your contributions when your pay rises.

Invest wisely. Workers have an average of 14 investment options in their 401(k), according to Hewitt, but many gravitate to two investments that could put their retirement at risk: company stock and stable-value funds.

Your savings could be wiped out if all your money is in an employer's stock and the company tanks. And by being too conservative when younger when you can afford to take some risk, you forfeit the prospect of the returns you might need to retire comfortably.

If you're not a hands-on investor, choose a so-called target-date retirement fund, if your plan offers this. You select a fund whose date is closest to the year you expect to retire, say, 2040. Professional managers do the rest. They will make sure you are appropriately diversified and gradually shift to more conservative investments as you approach retirement.

Don't borrow. About one out of five workers borrow, and the average outstanding loan is nearly $8,000, says Pam Hess, director of retirement research at Hewitt. There are a variety of reasons why loans are bad. Mainly, if you take money out of your account, it's no longer invested and growing.

Don't cash out. Forty-five percent of workers at midsize and large firms cash out their accounts when switching jobs, especially when balances are small, Hess says.

This devastates your retirement finances. Not only are you spending money that you'll need later, but you will owe taxes on the cash and possibly an early-withdrawal penalty, too.

Instead, roll the account over to a tax-friendly individual retirement account, where you can have a wide choice of investments. Or, better yet, roll the money into your new employer's plan if possible, says Martha Priddy Patterson, a director with Deloitte's human capital practice.

Here's another reason to do that: Investment fees in a 401(k) are lower than what you would pay with an IRA at a brokerage, Hess says.

Eileen Ambrose is a columnist for the Baltimore Sun.