Are You Making the Most of Your 401(k)?

Employers worry workers aren't.

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Think your 401(k) is in great shape? Your boss may not. Recent research shows many employers don’t think that their employees are taking full advantage of the defined contribution retirement plans they offer. The survey, conducted by consulting firm Towers Watson, of about 370 large employers found:

  • Only 22 percent of respondents thought that their employees made generally informed decisions about their defined-contribution plans.
  • Only 26 percent felt that their employees had realistic expectations about what their plans could provide.
  • Only 9 percent felt that their employees had established retirement goals.
  • Towers also conducts a retirement attitudes survey to gauge the feelings of employees with a defined-contribution plan. Among the findings of the 2011 survey:

    • Only 63 percent of respondents with only a defined-contribution plan felt somewhat or very confident that their retirement savings would last 15 years in retirement.
    • Only 42 percent respondents felt that their retirement savings would last for 25 years in retirement.
    • Whether you are an employer or an employee, these and other surveys don’t paint a very promising picture of the retirement readiness of the American worker.

      What can you do as a 401(k) participant to ensure that you are ready for retirement?

      Take an interest. I’ve read many articles saying that, in effect, many American workers spend more time planning their vacation then they do monitoring their 401(k) or planning for retirement. Before you travel, you likely spend many hours finding things to do at your proposed destination, booking reasonably priced flights and accommodations, or researching restaurants. Your retirement is a destination as well, and unlike a vacation that might not meet your expectations, you only have one shot at getting it right. Nobody is saying that you have to become an expert, but I do suggest that you become more than a bit knowledgeable. The investment of your time will be well worth it, whether you “do it yourself,” or hire a financial professional.

      Don’t automatically take the easy way out. Target-date funds are touted as the one-size fits all solution for 401(k) investors. You invest in the fund with a target date that is close to your anticipated retirement date and you let a professional allocate and invest your money. Sounds like a great approach, and in many cases it is. I especially like target-date funds for younger 401(k) participants, those who are just starting out and for whom the 401(k) might be their only investment. Using a long-dated target-date fund provides an instantly diversified portfolio that is naturally tilted towards equities, which is appropriate for their age. I’m not as big of fan for 401(k) participants who are within 15 years of retirement. By this stage, they should have a financial plan in place that includes an investment strategy tied to that plan. They might also have old 401(k) accounts or IRAs from rolling over those old plans during job changes or other events, plus other investments such as a brokerage account, a spouse’s retirement plan, etc. The target-date fund’s one-size-fits-all approach with a retirement glide path that may or may not be right for a more complicated retirement portfolio is just not the way to go in my opinion. It’s worth seeking out more customized advice.

      Get a plan. You need a financial plan. Whether you hire a financial professional to help with this process or you do it yourself, your need a financial plan to help guide you on the path to retirement. You also need to monitor that plan and periodically adjust it if needed.

      Take charge of your retirement savings and planning. Don’t be part of the negative statistics above.

      Roger Wohlner, CFP®, is a fee-only financial adviser at Asset Strategy Consultants based in Arlington Heights, Ill., where he provides advice to individual clients, retirement plan sponsors, foundations, and endowments. Read more about Roger here.