Planning For Retirement: Start Young

By: Polly Leider

When you're in your 20s, just starting your career, retirement seems a lifetime away. But in the first of a three part series on retirement, The Early Show's financial contributor Ray Martin explains why it's never too soon to start saving.

401(k) Plans Coming Up Short — Make Yours Measure Up

According to a new brief, "401(k) Plans Are Still Coming Up Short," from the Center For Retirement Research at Boston College, a close look at the Federal Reserve's latest Survey of Consumer Finance gives rise to some serious concerns about the role 401(k) plans are playing in providing for the retirement security of American workers.

This report concludes that 401(k) plans today are the main vehicle workers have to create financial security for retirement, but these plans require workers to decide whether or not to join, how much to contribute, how to invest contributions, when to rebalance, what to do about company stock and what to do with these accounts when changing jobs.

The findings in the report indicate that on each of these decisions, a significant proportion of workers make the wrong choices. About 20 percent of workers eligible to join a 401(k) do not do so. Only about 10 percent of workers participating contribute the maximum. Over half fail to diversify their investments by holding no stocks or too much stock. Many participants in plans of large employers over-invest in the stock of their company. Finally, a large proportion of workers cash out their 401(k) plan balances when they change jobs.

What makes the findings in the report so alarming is that over the past 25 years, the roles of providing for retirement income played by pensions and 401(k) plans have seen a dramatic reversal.

In 1983, most workers (56.4 percent) were covered by pension plans and only a small percentage (12.7 percent) was covered solely by a 401(k) plan. In fact, at that time 401(k) plans were viewed mainly as supplements to traditional retirement plans funded solely by employer contributions and workers presumed that their basic retirement income needs were covered by the employer funded plan and Social Security — therefore, 401(k) plans and participation in such plans were largely viewed to be optional.

But today, the roles of pensions and 401(k) plans have reversed: most workers (62.7 percent) are covered by 401(k) plans and only a small percentage (19.2 percent) is covered solely by a pension plan.

Today, workers need to know that their personal savings in a 401(k) plan will be their main source of retirement income with the distributions from such plans providing for their basic retirement income needs. For many workers covered solely by 401(k) plans, avoiding mistakes in such plans is critical to accomplishing financial security in retirement.

To help workers covered by 401(k) plans, the following is a list of the biggest mistakes many workers make with their 401(k)s and some important things to know to avoid these mistakes.