5 Ways to Fix Up a Beaten Down 401(k)

In the midst of a market meltdown and economic crisis, many Americans' 401(k) retirement plans are looking a bit bedraggled. But some tender loving care from plan participants, employers and policy makers can help spruce up these accounts.

Market upheaval has underscored a litany of woes in 401(k) plans. Many people don't save enough, make poor investment choices, pay high fees that eat into returns, and raid their retirement accounts to pay credit-card bills or fight foreclosure. Meanwhile, hard-hit employers are suspending 401(k) matching contributions.

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And a market crash on the eve of retirement can crush the 401(k)s of even the most diligent savers. In the 12 months following the market's peak in October 2007, more than $1 trillion worth of stock value was shaved off 401(k) and other defined-contribution plan accounts, according to Boston College's Center for Retirement Research.

Those losses are particularly painful because the 401(k) has become the primary retirement savings vehicle for many Americans. Roughly 50 million people have 401(k)s, and these accounts now have about $2.5 trillion in assets, estimates the Employee Benefit Research Institute in Washington.

Lawmakers and employers already are looking at ways to improve the 401(k). At hearings in October, the House Education and Labor Committee heard a variety of proposals for overhauling these plans. And many companies have been automatically enrolling workers in 401(k)s and directing their contributions into broadly diversified funds. But you don't have to wait for change to come.

You, your boss and Congress can start fixing up 401(k) plans today. Here's how:

1. Save Till It Hurts…

Undersaving has always been a big issue in 401(k) plans, and the economic doldrums are only making matters worse. A recent survey commissioned by AARP, an advocacy group for older people, found that about 20% of workers age 45 or older had stopped contributing to a 401(k), IRA or other retirement accounts in the past year.

Think you can't save any more? Ask your payroll manager to calculate what your paycheck would look like if you boosted your 401(k) contribution, suggests Christine Benz, director of personal finance at investment research firm Morningstar.

"The percentages might seem daunting, but if you look at it in dollar-and-cents terms, you might find it's something you could easily implement," says Ms. Benz.

2. … Even With No Match

Employers' matching contributions are a big incentive for many workers to contribute to 401(k) plans. But major employers like General Motors and FedEx are suspending these contributions, and cuts are on the way at other companies. One out of 10 employers already has reduced or plans to reduce the match, according to a December survey by consulting firm Watson Wyatt Worldwide, up from 6% just two months earlier.

If your employer has suspended the match, you should boost your own contributions to make up for it. Together, the employee and employer should contribute at least 10% to 15% of the worker's salary to build a healthy nest egg, retirement experts say.

The maximum amount most workers can contribute to a 401(k) this year is $16,500. Workers age 50 or older can contribute an additional $5,500.

3. Set It and Forget It

Sharp market swings can lead 401(k) savers to make some poor investment decisions, like fleeing stock funds simply because they've taken a dive. Investors who dump stocks at depressed levels lock in losses that could take a big bite out of their savings.

People who leave the asset-allocation decisions in the hands of a professional don't have to worry about making emotional investment decisions in rocky markets. One solution: So-called target-date funds hold a broadly diversified blend of stocks, bonds and other investments and gradually shift toward a more conservative mix as investors near retirement.

But be aware that these funds can still fall hard and fast. The average target-date fund dropped 32% last year, while the Standard & Poor's 500-stock index fell 38.5%. Even 2010 funds for investors about to hit retirement fell 25%.

4. Pay Attention to Fees

Hefty fees can put a lot of cracks in your nest egg. Yet many employers haven't even tried to calculate the total costs of their plans. You should be able to see the total dollar amount you're paying in plan fees so you can compare the 401(k) and other savings vehicles such as an IRA, Ms. Benz says.

Some of the simplest, cheapest investment options -- indextracking funds -- aren't even offered in many plans. Rep. George Miller, a California Democrat who is chairman of the House Education and Labor Committee, wants to pass legislation encouraging all plans to offer at least one index fund.

5. Get More Workers Saving

Many companies don't offer 401(k)s, and many workers who do have the opportunity to invest often simply don't.

More and more employers are automatically enrolling workers. But many of these efforts focus only on new hires. They should also include existing employees. What's more, many workers don't have access to a 401(k). The costs and administrative burdens can be daunting for small businesses.

One solution might be for the government to make it easier for small employers to band together to offer workers 401(k)s, says Paul Stevens, president and CEO of the mutual-fund industry trade group the Investment Company Institute.