January 18, 2008
If you've procrastinated about signing up for your company's 401(k) retirement savings plan, you're not alone: About one-third of eligible employees haven't enrolled, even when their employer offers matching contributions and a variety of investment options.
Given the importance of personal savings to retirement income, this can be a costly mistake. Minus a rich uncle's fortune, the only way most Americans can ensure a secure retirement is by saving aggressively. That's why Congress passed the Pension Protection Act (PPA), which, among other reforms, made it easier for employers to automatically enroll employees in their 401(k) plans. Previously, you had to actively opt-in to participate in your company's 401(k).
More companies will likely begin offering automatic 401(k) enrollment thanks to newly finalized PPA regulations: Employers who follow strict guidelines about funds where they should direct employee default contributions will be protected from legal liability should market fluctuations impact account values.
If your employer adopts automatic enrollment, you'll be given ample advance notice before being signed up. You can always opt out, increase your contribution or change how your funds are invested - it's your money. But the hope is human nature will kick in (see "procrastination" above) and you'll embrace the wisdom of setting aside money for retirement in these tax-advantaged plans.
A few other considerations to make the most of your 401(k):
Matching contributions. Many employers match a portion of your savings. You're passing up free money if you don't participate, so always contribute at least enough to get the full match. Say your employer matches 50 percent of the first 6 percent of pay you save: If your salary is $40,000 and you contribute 6 percent ($2,400), you'd receive another $1,200 in matching contributions. Where else could you find a 50 percent investment return?
Investment options. Starting contributions is only the first step: You also need to manage how your account is invested. When faced with numerous or confusing investment options, many people opt for money market or cash funds, which, although less risky, are also less likely than stock or bond funds to outperform inflation over time. That may be a good strategy if you're close to retirement, but younger workers often have decades to weather stock market ups and downs.
One increasingly common option is the lifecycle (or target-date) fund, whose investment mixture varies based on your age and expected retirement date, becoming more conservative over time. Some employers also offer asset allocation or managed funds, where a mixture of investments is designed based on your individual needs. As always, consult a financial professional for questions about your particular situation.
Fees. Another important consideration when choosing investment funds is the plan administrator's various fees and expenses. Fees are usually expressed as a percentage of your plan assets and are typically deducted directly from your investment returns. It may take a little digging to uncover these fees, but it's worth the effort: A 1 percent difference in fees - say 1.5 percent vs. 0.5 percent - could decrease your account balance by thousands of dollars by retirement.
Ask your benefits department where you can find the plans' fees, and to learn more about 401(k) fees, visit www.dol.gov and enter "A Look at 401(k) Plan fees." Another good resource on 401(k) plans is Visa's free personal financial management site, Practical Money Skills for Life (www.practicalmoneyskills.com/benefits).
Get involved in actively managing your retirement savings - it's your future and your responsibility.
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