We often hear about how most Americans will be unable to maintain their standard of living in retirement. In fact, The Motley Fool recently dug deeper into this issue when examining the state of our retirement preparedness. But, while the situation is dire on the whole, a recent study shows that some conditions are improving.

Study findings
The Plan Sponsor Council of America recently announced findings of its Annual Survey of Profit Sharing and 401(k) Plans. The survey reports on 840 plans with roughly 10 million participants and $750 billion in plan assets. Fortunately, the survey results were positive for 401(k) owners. Both employers and employees are contributing more money for Americans' retirements.

Here are the key takeaways from the PSCA survey:

  • Average company contributions increased to 4.1% of pay, up from 3.7% in 2010.
  • 95.5% of plans that offer a match contributed one in 2011, up from 91% in 2010.
  • 79.5% of eligible employees made contributions to the plan, up from 76.9% in 2010.
  • Average participant deferral rate increased to 6.4% of pay, up from 6.2% in 2010. 

Despite the ongoing debate about the effectiveness of 401(k) plans, at least last year we collectively saved more for our likely decades-long retirements. But while more contribution dollars are great, good can turn to bad if we make poor decisions with our hard-earned 401(k) money.

Keep the following in mind when making 401(k) investment selections.

Rethinking company stock
Many employer-sponsored plans allow you to invest 401(k) dollars into your employer's stock. But the Enron scandal opened our eyes to the dangers of an overconcentrated position in our employer's stock. With Enron's demise, employees not only lost their jobs, but many also lost their retirement nest eggs as their savings were invested mostly in the company's stock. 

Since this tragic event, there's been a shift away from company stock holdings in 401(k) plans. In 2011, 15.5% of PSCA-surveyed plans allowed company stock as an investment option for 401(k) contributions. On the whole, plan participants have reduced their holdings of employers' stock. According to a Vanguard study, "Among plans offering company stock, the number of participants holding a concentrated position of more than 20% of their account balance fell from 42% in 2005 to 30% in 2011." That's good news, but a 20% position is still way too much. Financial advisors recommend that no individual stock make up more than 5% of your overall portfolio -- that holds true for your 401(k), too. Any more puts your retirement dreams at risk.

But, to give one example, as recently as last year, Bank of America (BAC 1.59%) employees -- including financial services professionals who should know better -- held overconcentrated positions of stock. Collectively, B of A workers held 13% of their 401(k) balances in the company's stock. When shares lost 58% in 2011, employees saw their balances plummet.

Simple solution
The popularity of target-date funds can be attributed to mandates that rose out of the Enron debacle. To address the lack of diversification in participants' 401(k)s, legislation now requires employers to offer a default investment option that takes into account a participant's age or projected retirement date.

Enter target-date -- or life-cycle -- funds, which are professionally managed portfolios that provide instant diversification. Over 68% percent of 401(k) plans included in the PSCA survey offer a target-date fund as an investment option, up from 61.5% in 2010. And Vanguard estimates that more than half of all 401(k) participants will be solely invested in a professionally managed allocation by 2016.

Net inflows into target-date funds rose nearly 16% in 2011. Target-date fund industry leaders -- Fidelity, Vanguard, and T. Rowe Price -- collectively hold about 75% of open-end target-date assets. However, other players have gained serious traction and are building profitable target-date businesses. Most notably, JPMorgan Chase (JPM -0.40%) jumped four spots in last year's rankings and Manulife Financial's (MFC 0.18%) John Hancock moved up two.

Meanwhile, asset manager BlackRock (BLK 0.55%) dropped in the rankings last year. The company has also faced fierce competition in its iShares exchange-traded fund business, most notably from Vanguard and Charles Schwab. Both Putnam and Goldman Sachs (GS 1.78%) have also struggled with their respective target-date businesses, as each company experienced not only target-date fund performance snags, but also net outflows of over 30%. 

Foolish bottom line
In order to retire on your terms, you need to build a robust retirement nest egg by increasing your 401(k) contributions. But don't forget to consider how that money is being invested. If you're investing in your employer's stock, make sure it's in the appropriate amounts. And consider target-date funds for instant diversification.