How Washington Might Change Your 401(k)

There's always room for improvement -- especially when it comes to your 401(k). After 2008, during which many American workers saw the value of their retirement accounts plunge 40% or more, even these terrific plans could probably benefit from a few reforms. With that in mind, Congress is considering changes to the rules that govern 401(k)s. We've rounded up a few of the ideas they've put on the table thus far.

Fee disclosure
Fees matter much more than most of us suspect. Suppose you sock away $10,000 per year in your 401(k), earning an annual average of 10% over 25 years. At a 1% expense ratio, your return shrinks to 9%. At 2%, your returns are down to 8%. (Some 401(k)s charge even more than that!) Over 25 years, your nest egg would grow to $923,000 at 9%, but only $790,000 at 8% -- a $133,000 difference!

To help investors steer clear of steep fees, better disclosure would be a great place to start. Reform recommendations have included requiring plans to disclose and itemize fees at least once a quarter, and making all plans offer at least one low-cost index fund. (Some index funds charge less than 0.20% in fees, which would increase your hypothetical nest egg above to more than $1 million.)

While you should always pay attention to fees, remember that the lowest-cost investment option isn't always the best. A money market fund might sport the lowest fees in your plan's lineup, but its relatively low returns won't help you build a nest egg for retirement quickly.

Other proposed reforms include making plans disclose their relationships to other financial service providers, so that you can more easily spot any conflicts of interest.

Helpful projections
Yet another reform idea would have your 401(k) plan inform you regularly about how much monthly income your current account balance would give you in retirement. I love this idea, because it will likely show many people that they need to save and invest more, and more effectively.

Of course, even that projection would only be an informed estimate. If the market tanked, you'd still be faced with a smaller payout. To help avert that possibility, you can convert part or all of your account balance into an annuity that pays a guaranteed monthly benefit. With annuities an increasingly popular topic in the 401(k) world lately, I wouldn't be surprised to see them become an option in many future plans.

If you're not keen on the idea of annuities, you might choose instead to ultimately move your 401(k) money into an IRA upon leaving your employer. In an IRA, you can invest directly in strong individual stocks -- like, say, these potent dividend payers:

Company	CAPS Stars (out of 5)	Recent Yield	5-Year Avg. Annual Dividend Growth
Safety Insurance (Nasdaq: SAFT  )	*****	4.6%	32%
ConocoPhillips (NYSE: COP  )	*****	4.0%	17%
Marathon Oil (NYSE: MRO  )	*****	3.1%	15%
Exelon (NYSE: EXC  )	****	4.5%	11%
Kimberly-Clark (NYSE: KMB  )	****	4.0%	9%
General Mills (NYSE: GIS  )	****	2.8%	8%
Emerson Electric (NYSE: EMR  )	*****	3.2%	11%

Data: Motley Fool CAPS.

Solid, reliable dividend payers can essentially generate annuity-like income for you year after year. But to make the most of their payout power, you'll still need to amass a sizable nest egg. If your dividends average 5% on a $300,000 account balance, they'll kick out just $15,000 in your first year -- probably not enough to live on.

Maximize, maximize
Whether or not Congress makes any of these changes, you should already be making the most of the variety of tax-advantaged retirement plans currently available. Few of us will be able to live on Social Security, and even fewer of us have pensions. With our retirement needs increasingly in our own hands, it's more critical than ever to learn more about investing.

Got a great retirement tip you'd like to share? A favorite strategy that's working well for you? Share your Foolish insights in the comment box below.