Saving for Retirement:
401(k) Participation Still Too Low

According to a recent Harris poll, only about a third of workers in the U.S. will have enough money saved to retire in comfort. Twenty-seven percent don't expect to have enough saved, and 39 percent aren't sure. According to the survey, less than half, or about 45 percent of workers, do participate in a 401(k) or 403(b) plan. Fourteen percent have the option but do not participate, and 35 percent are not given the option by their employers.

A 401(k) plan is a type of voluntary retirement plan, which a company can offer to its employees. Employees can contribute to the plan and save for their retirement, and all contributions are tax-deferred, which means that taxes are paid on the contributed amount only when withdrawals are made, presumably upon retirement. Employers are not obligated to make a contribution, but many offer a dollar-for-dollar contribution, or will contribute up to a certain percentage. A 403(b) plan is a similar plan that is offered by non-profit companies.

After 2006, new legislation will allow companies to offer employees the option of a Roth 401(k), which offers more advantageous tax treatment. Under the Roth 401(k), contributions are made after taxes, but all withdrawals are tax-free.

It is more likely for households that have higher incomes to participate in a 401(k). Only about 22 percent of workers who have a household income of less than $35,000 participate, while 40 percent of workers with household incomes of between $35,000 and $49,999 participate.

Starting a 401(k) early in one's working life will greatly contribute to a comfortable retirement. Social security alone is inadequate for almost everybody, but the combination of a 401(k) retirement fund and social security can make your later years much easier. Deciding on how much to save in your 401(k) is a factor of how much your current living expenses are and what you expect to need when you retire. If you start your retirement plan early in life, and are also fortunate enough to purchase a house early on, chances are, you won't be burdened with a mortgage payment when you retire and your need for income will be reduced.

And although the 401(k) is a good way to save for retirement (and can yield a bigger benefit than a traditional pension plan if done right), Americans are still not very good at saving for retirement. Statistics show that nearly half of U.S. workers cash out their 401(k)'s when they switch jobs instead of rolling the accounts over.

When managing your 401(k) however, it is important to consider not only the amount you contribute, but also the investments that are being made. You will get the biggest benefit if you contribute a large enough amount so that you can get the maximum company contribution. Revisit your plan and its investment strategy every year, and change it as appropriate, sticking with a balanced fund that divides assets between stocks, bonds, and money market to get a good, but safe return.

Information is for educational and informational purposes only and is not be interpreted as financial or legal advice. This does not represent a recommendation to buy, sell, or hold any security. Please consult your financial advisor.