Start Doing This or You'll Retire Poor

Many investors would just as soon forget last year, and for good reason -- the downturn ravaged 401(k) account balances. But the more important issue is whether workers are doing the right things in response to a terrible 2008.

Another look at 401(k) plans
Recently, 401(k) administrators have reported about what their participants have done with their money lately. After Fidelity released its quarterly report a couple of weeks ago, Vanguard followed suit last week with its look at 2008 data from its 3 million customers across 1,800 plan sponsors.

The report included a lot of good news. Here are some positive signs for workers:

• Muted losses. Even with the stock market down sharply, account balances for continuous 401(k) plan participants in 2008 fell less dramatically -- about a 14% loss at the median, with a third of plan accounts actually staying flat or rising in value.
• Higher automatic enrollment. The number of plans offering automatic enrollment into quadrupled from 2006 levels, with most of those plans opting for some form of balanced investment option as their default rather than a money-market fund.
• Target-date fund popularity rising. About 70% of plan sponsors offered target-date funds in 2008, with more than a third of eligible participants using them.
• Active trading levels low. Only one out of every six participants traded in their 401(k) accounts in 2008.
• Participants got smarter. Most employees avoided risky practices like owning too much employer stock, taking 401(k) loans, and opting for cashing out rather than rollovers when they switched jobs.

But hold off before you count the 401(k) problem solved for good. Workers have a long way to go before they should feel safe about their plan accounts.

Not saving enough
Perhaps most revealing about the report was how little most people have in their 401(k) plans. Vanguard's average balance was $56,000, while half of all participants had $17,400 or less in their accounts. Only 15% had account balances of $100,000 or more. Even with many young participants, those numbers aren't encouraging.

Moreover, most people didn't save a big percentage of their salary. More than half of participants saved 6% or less, while only a fifth set aside 10% or more of their earnings to their 401(k).

Making the wrong investments
In addition, 401(k) participants don't always invest well. For instance, only small percentages of workers invested in small-cap or international funds. Those numbers don't include the allocations to those assets in target funds, though, so the numbers aren't quite as discouraging as they appear.

In contrast, what workers do buy is employer stock. More than half of those who can buy shares do so. And while a vast majority of them -- 80% -- have 20% or less of their 401(k) invested in it, numbers from outside Vanguard suggest the problem is much more serious at some companies. For instance, look at how much workers at these companies have in company stock:

Source: Brightscope.

Given how much workers already rely on their employers for their salary, pension, and benefits, putting a big slug of money into company stock leaves you dangerously reliant on your company's survival. That's a risk you probably shouldn't take.

A fair snapshot?
Although 401(k) statistics are interesting, you should take them with a grain of salt. Many people make big investments outside their 401(k)s that can change things dramatically.

But you can still take a few lessons from the report:

• Take charge. Don't just rely on your plan's default choice. Look into your investment options and choose the ones that make sense for you.
• Save more. The thing you have the most control over with your retirement nest egg is how much you set aside from your paycheck. The more you can live without now, the more you'll have later.
• Don't panic. It appears that whether it was simple inertia or conscious choice, most participants stayed the course throughout last year's panic. Stick with your long-term investing plan and you should also come out ahead in the long run.

Your 401(k) is one of the most valuable tools you have for retirement. Make the most of it, and you'll get the results you want.