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Moving past 401(k) paralysis

It's that time of year again. No, I'm not talking about the upcoming holidays. Rather, this is the season to enroll in your employer's benefit plans. Among the decisions employees will be faced with is what to do about their 401(k) plans.

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Here's what to do: If you haven't yet done so, sign up. If you are already signed up, consider increasing your current contribution level.

Participation rates in the United States vary from 45 percent to 70 percent, depending on which survey you read. Fidelity's fall 2005 retirement survey indicates that the typical American household has $20,000 in retirement savings and is on track to replace only 56 percent of its pre-retirement income (counting pensions and Social Security), down from 59 percent last spring. No wonder many Americans express doubt that they'll have enough money to retire.

But who cares about general trends? Focus on the trend that matters -- the one in your own household.

Fund paralysis
Many workers don't sign up for their plans because they are paralyzed by indecision, confronted with a dizzying array of fund choices.

Recognizing this, and quite possibly also the potential for liability in providing inappropriate and confusing retirement plans, employers are making it easier for workers by offering fewer fund options these days. The typical plan offers 14 funds.

As an example, my husband's workplace plan is switching from one that offers 185 funds to one with fewer than two dozen. The new plan divides its funds among three tiers. I'll describe them to you, because they're becoming commonplace, and it might help you in making your own investment selections.

No-brainer fund choices
In the first tier are target retirement funds with dates scheduled in 10-year intervals, beginning with 2005 and ending in 2045. These are easy to figure out. The 55-year-old would choose the Target Retirement 2015 fund, since that would be the approximate year of retirement, while a 25-year-old would pick Target Retirement 2045. The closer the retirement date, the more conservative the fund's investment allocation. Conversely, the farther out the date, the more aggressively positioned the fund. These are "no-brainer" options, since workers need know nothing more than the projected date of their retirement.

Roughly two-thirds of large firms offer these types of funds in their retirement plans. Of course, different investment firms run their funds differently, some with index funds and others with actively managed funds. Obviously, they don't come with investment-return guarantees. Whether you'll have enough money at retirement will depend, in large part, on your contribution to the fund over time.

In the second tier of the plan are a half-dozen index funds. These are perfect for investors who believe that passive investing is the way to go, and who may only want to tinker with their asset allocation -- the amount invested in foreign and domestic stocks, bonds and money market funds.

The third tier offers 10 "specialty" funds, which are actually high-profile, actively managed funds that fit in one of the style categories -- small, midsize or large company funds, with either a value or growth bent (or a blend of the two). These are for investors who want to take an active role in their retirement planning and who believe they have a better chance at beating the market by selecting from among these funds.

The best choice
For workers with limited knowledge of investments, target-date funds are a smart choice. In a recent Wall Street Journal Online poll, nearly half of respondents between the ages of 18 and 34 said they would be likely to invest in these funds if given the option, while 43 percent in the 35 to 54 age group concurred.

 
 
Next: There isn't any one right or wrong way to invest.
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