Pay Attention to Your 401 (k)

Pay Attention to Your 401 (k)

Fund your do-it-yourself pension plan now or regret it later

For many people, 401 (k) plans will be their largest retirement asset. Yet many employees are contributing below levels allowed by law, and fewer than 35 percent of 401 (k) plan participants set aside enough money to the plan to earn the maximum company match, according to Hewitt Associates, an employee-benefits firm in Illinois. When you figure in compounding over time, that could mean a loss of hundreds of thousands of dollars.

The plans, which get their awkward name from the section of 1978 tax code that created them, are available mostly to corporate employees. They are retirement savings plans that allow you to make voluntary pretax contributions of as much as 15 percent of your salary, or up to a sliding limit, whichever comes first. Employers make contributions on behalf of employees, in most cases matching about half what the employee contributes, yp to 6 percent of one’s salary. Another attraction : a 401 (k) helps out current taxable income and defer taxes on earnings until they are withdrawn on retirement.

Most plans offer several investment choices, including stock and bond funds, and low-risk options like a money market fund of a guaranteed investment contract (GIC) sold by insurance companies. Despite the varied menus, a whooping 30 percent of 401 (k) money went into conservative money market funds of GIC funds, according to Ibbotson Associates of Chicago. The annual yields of GICs have averaged only 9.6 percent since 1995, according to Ibbotson, compared to 14.5 percent return rates for equities and 11.9 percent for bonds.

Always pay attention to your 401 k. White flowers and green and white leaves. Photo by Elena

Nearly all financial advisers agree that investors saving for retirement should allot money for stocks. Just how much depends on the risk level you’re comfortable with, but T. Rowe Price, the mutual fund company, suggests that for someone 25 years away from retirement about 80 percent should be invested in stocks. Those closer to retirement, may want to shift some money out of stocks into less volatile investments. If you’re five years away from retiring , you may want to allocate 40 percent to stocks, split evenly between an equity income fund and a growth fund. Another 40 percent would go into a balanced fund, which combines stocks and bonds and the remaining 20 percent would go into a low-risk GIC.

Not all 401 (k) plans are created equal, even among the nation’s largest companies. The maximum percentage of salary that an employee can contribute are the amount that an employer will match vary from company to company. So do the number and type of investment choices. You should look thoroughly into a scorecard comparing the plans of some of the nation’s largest companies