More workers put 401(k) savings on autopilot

by Center for Personal Finance editors

LINCOLNSHIRE, Ill. (5/22/06)--There's a ray of hope on the retirement savings front; it appears that efforts by some employers to get workers to stash more cash is starting to pay off (Hewitt Associates May 16).

A study released last week by human resource consultant Hewitt Associates revealed that about one-third (36%) of workers who had been on the job less than one year participated in a 401(k) plan in 2005, a six percentage point increase from the previous year.

Overall employee participation in company-sponsored retirement savings plans during 2005 was significantly higher for companies offering automatic enrollment--14 percentage points higher than the overall employee participation rate across all companies.

About 20% of employees who held investments in a lifestyle or lifecycle fund had their entire 401(k) balance in them, up from 15% the previous year, a positive trend towards using these funds in the "right" ways, according to researchers. The Wall Street Journal (May 16) noted that Congress is working on bills to encourage companies to incorporate auto-enrollment features and lifecycle funds into their 401(k) offerings.

However, the news is not all good. About one-third (32.8%) of employees just said no to their 401(k), and of those employees who did participate, 22% left money on the table--they didn't contribute enough to take advantage of the full company match. Only 30%--often younger, lower-tenured and lower-salaried workers--contributed just enough to get the match.

Hewitt researchers emphasized the importance of backing off from large holdings of company stock, in light of implosions like Enron Corp. and WorldCom. Although company stock is the largest holding for employees, the amount has decreased to 22% from nearly 27% in 2004.

Take steps to save more--and earlier:

Take full advantage of company-sponsored 401(k) retirement plans. If you can't contribute the maximum, at least contribute the amount required to receive the full company match. If you don't, you're throwing away free money.

Ask if your company offers lifecycle funds, which have a mix of investments of different types and characteristics; as you approach retirement, the allocation gradually and automatically changes to weigh more heavily toward fixed-income or stable-value investments, reflecting a lower tolerance for risk. This process is called asset reallocation.

Hold no more than about 10% of your overall portfolio in company stock.

Ask if your company offers the new Roth 401(k). After-tax contributions grow tax-free and the withdrawals taken in retirement are not subject to income tax if you're at least 59 � years old and you've held the account for at least five years.

Attend seminars in which specific products and services are not "pushed" by speakers. Be proactive--learn the basics of investing so you can make informed choices for a comfortable and potentially long retirement.

For more information, read "Introducing the Roth 401(k)�A New Workplace Savings Opportunity" in the Home & Family Finance Resource Center money savvy section.