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Talking Money: Maximize 401(k) for retirement security

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During the economic downturn, some companies reduced or eliminated their 401(k) matches. In 2009, consulting firm Watson Wyatt put the number of those that made cuts at one in five.

But today, some 401(k) plans are coming back strong, at least according to a recent survey from Charles Schwab, which found that on this side of the recession, more employers are adding plan features to drive up participation and help employees accumulate more savings. And matching dollars are on the rebound, with two-thirds of employers offering them.

So I thought it was time for a little refresher on how to maximize your company's 401(k) and take advantage of new benefits that may be offered. Here's the rundown on what you might be seeing these days.

  • Investment guidance: Many employers — 81 percent in Schwab's survey, nearly double the number in 2005 — are offering it. Generally, the advice will come from an independent third party such as Guided Choice or Morningstar to eliminate a conflict of interest. You may be able to get information about which investment options might be best for your situation. If your plan doesn't offer this, there are some good tools online. Try the Ballpark E$timate from Choose to Save (choosetosave.org/ballpark).
  • Target-date retirement funds: An October study from consulting firm Casey, Quirk and Associates predicted that half of the investments in defined contribution plans will be housed in target-date retirement funds by 2020. These are good options for hands-off investors because they allow you to choose a fund based on your estimated retirement date, and they'll diversify and set your asset allocation accordingly.

To use a target-date fund effectively, you have to put all of your money into that fund — otherwise, you risk doubling up on asset classes and taking too much risk. But don't be afraid to fudge the numbers a little. If you're more risk-averse than your peers, you can choose a fund with a date that is earlier than your projected retirement year; if you'd like to take more risk, choose one that ends a few years later.

  • Automatic enrollment and escalation: Nearly half of employers automatically enroll employees in their retirement plans. That's up from 5 percent in 2005, so this is a dramatic increase — and a very good thing.

But don't let automating cause you to disengage with the plan, says Jeanne Thompson, the vice president of retirement insights at Fidelity. "The plan may default at contributing 3 percent or 4 percent of your salary; as you get a raise, you may want to increase your savings rate. Three percent may not get you to retirement."

Some employers mitigate this by also offering automatic savings increases, meaning they'll bump up the percentage you contribute on an annual basis (and yes, you should take advantage of this as well).

Finally, make sure you that were enrolled in the right investments — most plans will put you into one of the aforementioned target-date funds, but it may not be the right year for your risk tolerance or you may want to be more hands-on.

  • Muted matching dollars: Yes, I said they're on the rebound. But they still haven't returned full force. When you have matching dollars coming your way, you'd be silly not to contribute at least enough to grab them. But even if you don't, the traditional 401(k) has other perks — for one, money is taken out of your check pre-tax, meaning you don't have to think about it and you don't risk spending the money. That also means you get a tax break now, in exchange for paying taxes on the money when you pull it out in retirement.

Still, without a match, you might hedge your bets and contribute a little to your 401(k) and a little to a Roth IRA. This gives you tax diversification, because unlike 401(k) deferrals, Roth contributions are made with after-tax dollars, meaning there is no initial tax break, but distributions — including earnings — are tax-free.

Finally, if you have high-interest-rate debt, such as a credit card — and no company matching dollars — you might divert cash that way first, since the return on that "investment" (i.e., paying off the credit card) would be equal to the interest rate you would have paid on the debt.

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