What you need to know to manage your 401(k)

In these tough economic times, any extra money can go a long way. But Carmen Wong Ulrich cautions you should stay away from your 401(k) at all costs. She speaks with James Brown and Rebecca Jarvis about alternatives. AP Photo/CBS News

New 401k changes
AP Photo/CBS News
(MoneyWatch) I recently wrote about the growing use of by participants in 401(k) plans. And in general that's a very good thing, as it shows more folks seeking expert on how to protect and grow their retirement savings.

But if you manage your own 401(k) plan account, there are some things you must do on a regular basis to get your retirement savings to grow every year. Here's my action plan for those who direct and manage their 401(k) plan accounts.

Increase savings to at least 6 percent. For most workers, their company's 401(k) plan provides employer-paid matching contributions when employees contribute, typically up to 6 percent of pay. Participants should make sure to immediately increase their contributions to a level high enough to qualify for the full employer matching contributions, which is six percent in most plans.

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Increase savings to 10 percent or more. Even saving 6 percent in your 401(k) plan account is not sufficient to build adequate retirement savings for most workers. This is particularly true for those who are covered solely by a 401(k) plan. Most workers today need to save and contribute at least 10 percent of their gross income to their 401(k) plan account, according to industry analyses.

Activate automatic contribution escalator. If you can't afford to immediately increase your 401(k) contribution percentage to 10 percent, then activate the automatic contribution escalator feature available in many large plans. Set this feature to automatically increase your contributions each year to reach a rate of at least 10 percent in two to three years. If your finances ever get tight, you can reduce temporarily reduce your contributions. But at the very minimum, you should always contribute enough to collect your employer's matching contributions.

Make catch-up contributions. For 2012, the maximum annual contribution a worker under the age of 50 may make to their 401(k) plan account is $17,000. Workers age 50 and over may contribute an additional "catch-up contribution" of $5,500, for a total annual contribution of up to $22,500.

Also be careful to reactivate these special contributions if you change jobs. When you take a new position and are automatically enrolled in your new employer's 401(k) plan, these additional catch-up contributions will not be activated automatically. You need to set up these contributions in your plan.

Check back in a few days, when I'll write about the things folks should be doing when they manage the investment mix in their 401(k) accounts.

  • Ray Martin

    Since 1986, Ray Martin has been a practicing financial counselor, providing valuable and practical financial guidance and advice to individuals. He has appeared regularly as a contributor on the CBS Early Show, CBS NewsPath, as a columnist on CBS Moneywatch, and on NBC-TV's morning newscast TODAY. He has also appeared on the Oprah Winfrey Show and is the author of two books.

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