How to Take Charge of Your 401(k)

Inertia used to be the silent enemy of retirement planning. People just didn't get around to signing up for employer-sponsored 401(k) plans.

But thanks to the Pension Protect Act of 2006, regulators began allowing employers to automatically enroll employees in retirement plans, and suddenly, inertia became retirement planning's secret best friend. New employees were automatically signed up for 401(k) plans, and, at first, were required to contribute 2 percent to 3 percent of their base compensation. Nearly everybody complied without a peep, so some employers ratcheted up the minimum contribution to between 4 percent and 6 percent, enabling more employees to capture the maximum employer match.

Large employers are more than twice as likely to auto-enroll their employees: According to a new study by Bank of America Merrill Lynch, 33 percent of employers with less than $5 million in employee 401(k) plans enrolled employees automatically, compared to 71 percent of employers with more than $100 million in employees' 401(k) plans.

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As your 401(k) grows, it accounts for a greater share of your total portfolio if you have outside investments. That means you might want to consider actively steering it instead of continuing to let the account be directed by the choices you initially made when it was set up.

These steps can help you change gears from passive to active management of your 401(k):

1. Figure out how much monthly income you will need in retirement. Calculate how much you need to save now to achieve that goal. Then, adjust your 401(k) contributions accordingly, depending on your other financial commitments and any employer matching contributions. The Employee Benefit Research Institute offers a suite of retirement income and savings calculators at its public service website, Choose to Save.

Joleen Workman, an assistant vice president with retirement and investor services at Principal Financial, says a good rule of thumb is to save about 10 percent of your earnings over the course of your working career. That should yield a retirement income of about 85 percent of the salary you earned just before retiring. But if you're starting late or have had savings interruptions, you might need to bump up your 401(k) contributions to catch up. A relatively painless way to do that is to increase your automatic contribution by one percentage point annually until you reach 10 percent. Those over age 50 can save more in their 401(k) plans, Moore says, according to Internal Revenue Service rules. This calculator from Principal helps you understand your momentum toward your desired retirement income.

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2. Review all of your benefits and ask yourself how adjusting one affects another. Your employer may provide financial planning services and educational workshops. Many of these services will give you an integrated view of all your benefits, from health to investment, Crain says. That means that you can get coaching on how to adjust, say, your health care pretax flexible spending account to channel more cash toward retirement savings.

3. Consider hiring an independent financial planner. According to the Principal Financial Well-Being Index, a quarterly survey, only 30 percent of employees work with financial professionals, but of those who do, 59 percent created their own financial goals.

For example, if you review your 401(k) with an independent certified financial planner, you might explore if a target-date fund is a good move, says Frank Moore, founding partner of Vintage Financial Services in Ann Arbor, Mich.

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Target-date funds adjust the mix of investments as retirement approaches, moving from a focus on growth to stability. Usually, Moore says, you can adjust the mix of funds in an employer-sponsored plan at no cost, but confirm the terms before you initiate a trade.

4. Track the returns in your 401(k). Using sites like, make sure the funds offered by your employer are at least keeping pace with similar funds. It's a good idea to conduct this benchmarking exercise annually, Moore says. If your funds are lagging, talk with your financial advisor about how and when to move some of your investments to different funds that are more likely to keep you on track with your goals.