With defined-benefit plans going the way of the bonobo (that is, to extinction), more and more employers are offering defined-contribution plans to employees. But many employees aren't biting. According to a recent Wall Street Journal editorial, fewer than 40% of workers between the ages of 20 and 29 participate in their employer's 401(k).

So to avoid a retirement apocalypse a few years down the road, the Pension Protection Act of 2006 makes it easier for companies to automatically enroll their employees in their retirement plan.

Sounds good, no?

Well, here's the hiccup: The legislation also makes it easier for 401(k) providers to offer investment advice along with their investment products.

Sounds like a conflict of interest, no?

Good lookin' out
The mutual fund industry hasn't exactly done much to inspire consumer trust in recent history. So giving plan providers the ability to advise customers on their investment decisions causes us to raise an eyebrow.

Of course, the government thought of this as well, and addressed the issue. According to the Washington Post, "It [the law] has a safeguard against conflicts of interest. ... It requires any manager who recommends financial products, and receives commissions on them, to rely instead on computer-generated recommendations."

Um, OK. The mechanical approach will ensure that sleazy peddlers aren't pushing high-cost, low-reward products to unsuspecting (and uneducated) employees. But computers are the solution? That seems like an awfully narrow idea -- it takes away any qualitative analysis from investment decisions, and ultimately may fail the best interests of the 401(k) participant. Moreover, if we can put on our Thomas Pynchon hat for a moment, computers aren't necessarily unbiased. They have to be programmed, after all.

Know what you're doing
The solution to this convoluted hullabaloo, however, strikes us as easy: Financial literacy for every American.

That's a tall order. Many of today's investors don't even know what to look for in a good mutual fund. According to the Washington Post, "[O]nly 30% of people who buy [mutual funds] through a work plan and 33% of those who buy through a professional look at costs."

Egads! If that stat is indicative of national trends (we can't vouch), we're horrified. A low expense ratio is one of the two core traits of the market's 10 best-performing funds of the past decade. And not only are 401(k) participants ignoring costs, they're doing so after receiving professional advice that is likely costing them even more money.

Our hope
We want financial literacy for all Americans, spurred by increased awareness of personal finance in public education.

But we'll start on a much smaller basis: If you're in a 401(k) plan -- and more than 65 million of you are -- study your fund choices. Favor funds with:

  • Low expense ratios. The best mutual funds have lower expenses on average. Look for expenses at or near 1% for actively managed funds, and at or near 0.25% for passively managed index funds.
  • Long management tenure. Top mutual funds have leaders who have guided the ship for almost six years on average.

Foolish final thoughts
We'll even give you a head start. Fidelity Capital Appreciation (FUND:FDCAX) is a favorite of Fool fund guru Shannon Zimmerman. It's been recommended in his premium mutual-fund research service, Motley Fool Champion Funds, and the fund has bested its benchmark by nearly nine percentage points per year (on average) over the past 10 years. What's more, its 0.9% expense ratio falls well below the category average. Current top holdings include Disney (NYSE:DIS), Motorola (NYSE:MOT), Morgan Stanley (NYSE:MS), Abercrombie & Fitch (NYSE:ANF), Broadcom (NASDAQ:BRCM), and Advanced Micro Devices (NYSE:AMD).

That's a good place to start if you're one of the millions of Americans who's about to get a 401(k), or one of the millions of Americans who'd like to manage their 401(k) better. If you'd like some more ideas and aren't interested in leaving your financial future up to a computer, consider joining our Motley Fool Champion Funds service. It's low-cost, unbiased, and full of good ideas. Still not sure? Take a look and decide for yourself. It's free for 30 days.

Tim Hanson and Brian Richards do not own shares of any company mentioned in this article. Their heads almost exploded when they read Gravity's Rainbow, and they wonder whether Thomas Pynchon's new book will finish the job. Tim and Brian sure hope you played along with the allusion in their headline. Disney is a Stock Advisor recommendation. The Fool has a disclosure policy.