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After Labor Day, celebrate 401(k) Day

Each year we honor the achievements of American workers on Labor Day by taking the day off and having a barbecue.

You may not have heard about it, but the day after Labor Day is another important event -- 401(k) Day. It's largely a symbolic holiday that can take place any time of the year, designed by the financial industry to raise our consciousness about retirement savings. In preparation for this event, the Profit Sharing/401(k) Council of America, or PSCA, created a superhero action figure -- Captain 401(k) -- whose mission is to combat his arch nemesis, the savings procrastinator.

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That would be anyone who has access to a 401(k) plan but hasn't yet signed up. Or it would be those of us who are signed up, but are deferring an inadequate amount of savings. We can be our own worst enemy when we neglect such an important matter.

Captain 401(k): No excuses
Too young? Too old? You've already saved up a tidy sum? You've saved absolutely nothing? You have too many bills? You know nothing about investing? None of these are good reasons to forgo contributing to your company's 401(k) plan if you're lucky enough to work for a company that offers one.

If you're already maximizing your 401(k) plan or another type of defined contribution plan at your workplace, then you understand the importance of saving for retirement. But if you've put off a decision about enrolling in a 401(k), a 403(b) for nonprofit workers, or a 457 plan for government workers, then listen up: It doesn't matter what your circumstances are. You must conquer inertia and sign up for your company's retirement plan at your next opportunity.

Why is this so important? Because the days of working for the same employer for 30-odd years and getting rewarded at the end of that time with a retirement pension are history. Only 20 percent of the private sector workforce has access to a traditional pension plan, and not all of them will get the payout they've been promised. These "defined benefit" plans require a lot of funding by employers, which explains why some are filing bankruptcy to avoid funding them further. And it's not only the airlines that are affected. American businesses reported a "record shortfall of $353.7 billion in their latest filings" about their underfunded pensions with the Pension Benefit Guaranty Corp.

Social Security, the one leg of the three-legged retirement footstool that we could always depend on, is wobbly right now. Some academics believe the fiscal imbalances caused by Social Security and Medicare combined threaten to throw our country into bankruptcy. Congress has spent the better part of this year debating how to make Social Security fiscally solvent and palatable to the American public. We don't know what the final outcome of this debate will be, but chances are good that benefits will get cut and taxes will increase. So while you may get some type of Social Security stipend during your old age, don't count on it to pay all your bills.

So that places the responsibility of your retirement squarely on your own shoulders. Feeling burdened? The longer you wait, the heavier it gets.

IRAs vs. 401(k) plans
You can invest in other investment vehicles, such as a traditional or Roth IRA (though these are subject to certain deductibility or income restrictions). IRA assets make up the largest component of the retirement market, at $3.5 trillion as of year-end 2004, according to a report from the Investment Company Institute. Many of these vehicles are funded by rollovers from 401(k) plans -- more about that later. Defined contribution plans hold another $3.2 trillion, with two-thirds of that amount in 401(k) plans.

Limits to IRA contributions are stringent; the maximum amount you can invest in 2005 is $4,000 ($4,500 if you're 50 or older). In a 401(k), you can contribute as much as $14,000 in 2005 and an additional $4,000 if you're 50 or older. In 2006, the contribution amount allowed in 401(k) plans increases to $15,000; $20,000 for the 50-plus set.

-- Posted: Aug. 31, 2005




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