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Fidelity's Frustrating Findings

Many times when I read interesting survey results, I notice that 100 people were surveyed. Or maybe 1,000. These small numbers can yield insightful information. But recently, I ran across survey results with bigger numbers: 10 million!

It was Fidelity Investments' "Building Futures VIII" annual study of the state of 401(k) plans in America. The company looked at participants in nearly 13,000 defined-contribution plans Fidelity administered in 2006 that together held $674 billion in assets.

Here are some of their findings and some thoughts on them:

Automation works
One interesting issue in the 401(k) world today is automation. Researchers discovered that because not enough people take maximum advantage of workplace savings tools such as 401(k) plans, it's a better idea to enroll employees and increase their contributions automatically over time, letting them opt out if they wish.

Fidelity found that this trend is growing briskly, but it still includes few employees -- just 200,000 in the survey. Employers who did this had much higher participation rates than those with plans without auto-enrollment, and contribution rates were higher. Use of lifecycle funds more than doubled when used as default options in plans.

So that's good; but faster adoption of automatic enrollment will help more people. Note that lifecycle funds are worth considering, by the way. They're designed around specific retirement dates, with their asset allocations chosen to give you broad diversification appropriate to your age. For instance, with Vanguard's 2025 target fund, you'll own shares of U.S. companies such as ExxonMobil (NYSE: XOM  ) and IBM (NYSE: IBM  ) as well as foreign companies such as Vodafone (NYSE: VOD  ) and Sony (NYSE: SNE  ) .

Low averages
For all the plans studied, the average participation rate was just 63%, down a mite from 2005 levels. (That number is only 29% for Generation Y youngsters.) Some might assume that this isn't a red flag, that perhaps the other 37% of employees take care of their retirement needs other ways.

I doubt this. Odds are, many people postpone taking action, keeping "enroll in my 401(k) plan" on their to-do list. This can be a future-crushing kind of procrastination, because the earlier you invest your dollars, the more time they'll have to grow for you.

It's also tragic because more and more of us don't have much else to rely on for our futures. This year you can only contribute $4,000 or $5,000 per year to an IRA, but most of us can contribute $15,500 or $20,500 to a 401(k). (The higher numbers in both cases apply to those 50 and older.) Fewer and fewer of us have traditional pensions, as many companies are phasing them out. And Social Security? Well, we can't exactly count on that for all our needs.

Another troubling number: Employee contributions overall remained unchanged at 7% of their income. And the study disclosed that three out of four workers aren't properly diversified for their age. Yikes!

Most of us would do well to contribute at least 10% of our income to our retirement accounts. Really, 15% would be even more effective -- if you're young, it will permit more money to grow longer, and if you're older, it will help you catch up to where you need to be.

Here's another troubling detail: With the small contributions, 401(k) participants will replace only 17% of their income from their plan balances. Now I don't know about you, but when I retire, I hope to do so on more than 17% of my current income, and I don't expect Social Security to provide 50% of it.

What to do
Fortunately, you don't have to face shocking and tragic results after your retirement farewell party. You have time to learn more and take action now to improve your tomorrow.

Start at our 401(k) nook, and check out these articles:

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