Saving for retirement is about to get a whole lot simpler -- so simple, in fact, that in the near future about the only thing you'll have to do to keep your retirement saving on track is show up for work. What has changed? Landmark legislation that Congress passed last year encourages employers to enroll workers in a 401(k) automatically, increase employee contributions automatically each year and automatically invest the money in the stock market, which offers the greatest potential for long-term growth.
Employers aren't required to offer these savings features. But many already do, and Congress's endorsement will prompt others to follow suit. Saving for retirement could become as easy as it was in the old days, when more workers earned a traditional pension. There's one big difference: Now you're using your own money, in addition (sometimes) to your employer's.
||Retire a Millionaire|
||Build Your Perfect Retirement Portfolio|
||Rating the Online Retirement Planners|
The new legislation represents the biggest shift in 401(k) plans since they were created 25 years ago, says Chris Jones, chief investment officer of Financial Engines, a leading provider of 401(k) investment advice. Says Jones: "This is unquestionably a good thing for 401(k) participants." And its significance can't be overstated now that 401(k) plans, once viewed as supplemental to traditional pensions, are the primary retirement-saving vehicle of 47 million Americans -- more than twice the number of people now covered by traditional pension plans. In 2005, more than half of the nation's $14.5 trillion in retirement assets were held in IRAs and other worker-owned accounts -- surpassing pension-plan assets for the first time.
Young workers such as Ryan Lessner stand to gain the most from automatic 401(k) features because they'll profit from decades of steadily increasing contributions and solid investment returns. Lessner was automatically enrolled in his employer's 401(k) plan when he was hired five years ago. Now 29, and recently married, he has already accumulated more than $42,000 in retirement savings and is on course to amass about $1.8 million by age 65 -- and that assumes no future raises or increases in his contributions. (To figure out how much you'd need to save each month to accumulate $500,000, $1 million or $2 milion, see Retire a Millionaire.)
Older workers in their forties and fifties will also benefit from the new law, which permanently extends higher contribution levels for 401(k)s and IRAs, as well as catch-up contributions for workers 50 and older. This year, all workers can contribute up to $15,500 to 401(k)s and similar workplace-based retirement plans, up $500 from last year. Workers 50 and older can kick in an extra $5,000, for a total of $20,500 in 2007. In addition, you can contribute up to $4,000 to a Roth or traditional IRA, plus an extra $1,000 if you're 50 or older.
The new law also makes Roth 401(k) plans permanent. As a result, more employers are expected to offer Roth 401(k)s, which provide tax-free income in retirement.
Not only will you be able to put more money aside for retirement, but you'll also be able to get advice on what to do with it -- if, like many workers, you lack the time, interest or expertise to make those decisions on your own. Starting this year, employers will be encouraged (but not required) to provide employees with investment advice.
Company-provided financial advisers can recommend specific investments within your 401(k) menu -- including mutual funds managed by an adviser's own company -- as long as their fees aren't affected by which investments you choose. They can also make recommendations based on computer models that take into account your age and how much risk you're willing to take.
To make things even simpler, more companies are offering employees one-stop investment options such as target-retirement funds (also called life-cycle funds), which essentially combine advice and investing in one product. The idea behind target-retirement funds is to invest all of your 401(k) money in a single fund geared to your projected retirement date.
Initially, the investments are tilted heavily toward stocks, but the asset mix gradually grows more conservative as you near retirement. At Fidelity, the nation's largest 401(k) provider, 83% of its nearly 12,000 plans offered age-based funds in 2005.
That kind of simplicity is a huge selling point. When the union representing editorial staff members at the Boston Globe switched 401(k) providers from Putnam Investments to the Vanguard Group in 2005, participants were given the choice of selecting their investments from a new menu of mutual funds or being automatically enrolled in a target-retirement fund. Two-thirds of the nearly 900 plan members were switched to an appropriate target-date fund by default because they didn't make a selection.