Fact: According to the U.S. Department of Labor, one out of three people eligible to participate in 401(k) plans don't.

That's a problem. With Social Security facing more uncertainty every year, saving for retirement on your own is more critical than it has been in decades.

In recent years, many companies, including big employers like Hewlett-Packard (NYSE:HPQ), Motorola (NYSE:MOT), J.C. Penney (NYSE:JCP), and Monster Worldwide (NASDAQ:MNST) have tried to address this problem by adopting automatic enrollment policies. When you start work at one of these firms, you automatically get enrolled in the company's 401(k) plan, and contributions are automatically deducted from your paycheck, unless you opt out. Sounds good, right?

There's a catch, though. In many plans, those contributions are defaulted into a money market fund or similar ultra-conservative investment. Although some plans have adopted more aggressive default options, many employers have stuck with the cash or "stable value" products from fear of getting sued. They don't want to be on the hook for pushing people to invest in something that crashes and burns.

What to do?

Here come the Feds
Enter, as always, the federal government. One section of the Pension Protection Act, signed into law in 2006 and put into action earlier this week via regulations issued by the Labor Department, is intended to be the solution. Specifically, the Act provides a safe harbor -- legalese for protection from lawsuits -- for employers who choose to default their new participants into something more aggressive than a cash fund.

What's "something more aggressive"? The Feds have blessed three types of options:

  • Lifecycle funds. These funds, which include Fidelity Freedom Funds, Wells Fargo's (NYSE:WFC) Advantage Target Funds, and the T. Rowe Price (NASDAQ:TROW) retirement fund family, generally come in sets with a range of "target" dates in the funds' names. The idea is that you pick the date closest to your planned retirement date, and the fund automatically invests in a portfolio of assets appropriate for your remaining time horizon, shifting to become more conservative over time. As default options go, they're a much better bet than a money market fund, but they have their ups and downs.
  • Managed account. In this context, think of this as a service that allocates your money among your plan's options for you, taking your retirement date into account and reallocating your assets over time. The pros and cons of a service like this will be roughly similar to those of a lifecycle fund, at least on the default level.
  • Broad products that include stocks. The example given by the Labor Department for this category is a balanced fund, and that's what I would expect to see here -- a mutual fund or similar product that includes a mix of stocks (usually 50%-65%) and bonds and maintains a roughly fixed level of risk and exposure over time.

So what does this mean for you?
If you're participating in your workplace plan, you're happy with your investments, and you're not planning on changing jobs any time soon, these new regulations probably don't mean much. Your plan might add some new options -- a set of lifecycle funds, for instance -- but generally, you'll be unaffected.

But if you change jobs to a company that has auto-enrollment, find out what your new plan's default options are. While any of the new options are better for most everyone than being left in a money market or stable value fund, your plan probably also offers better options for your needs. Even if you're tempted by the one-stop solution of a lifecycle fund, review these caveats and consider fine-tuning your risk exposure by opting for a fund with a longer or shorter time horizon than the default. And whatever you do, make sure you're contributing enough to collect 100% of your employer's matching funds -- don't leave free money on the table. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.