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Take Advantage of Retirement Savings Opportunities from Your Employer

With Social Security perhaps not as secure as it sounds and with more and more companies reducing or stopping pension plan benefits, the retirements of many Americans will need to be funded by individual savings efforts. One of the best ways to do this is through any retirement savings opportunities offered by your employer.

Employer-Sponsored Retirement Plans Have Changed

In the past, it was common for employers to offer pension plans that promised retirement benefits to workers who provided long-time service. These plans - sometimes referred to as defined benefit plans - required little decision-making on the part of individual worker; the employer set up the plan, funded the plan and selected the type of investments to hold the plan's funds until benefits were passed to retired workers. With a defined benefit plan, the amount of a worker's retirement benefit is determined primarily by the length of time the worker stays at the company, and the only decision individual workers can make to influence their retirement benefits from a defined benefit plan is the decision of how long to work for the company.

According to the Bureau of Labor Statistics' 2005 National Compensation Survey, 60% of all American workers have access to some type of retirement plan, but of that amount, only 22% have access to defined benefit plans such as the traditional pension, while 53% have access to a defined contribution plan, such as a 401(k), 403(b) or Section 457 plan. Defined contribution plans are funded differently than defined benefit plans and require some active participation from workers to get them started. With defined contribution plans, workers can choose to take a certain amount from their paychecks and set it aside for retirement savings. Employers sometimes contribute funds that "match" a portion of the funds individual workers put into defined contribution plans - commonly based on a certain percentage of the worker's contribution. Funds placed in defined contribution plans are often given special tax status, frequently allowing the funds to grow pre-tax.

With defined contribution plans, it's up to the individual employee to decide how much money to put in and which of the available investments to place the money in. These types of decisions can allow individual workers to make their retirement savings grow much larger than the set amounts available through defined benefit plans, but they also require getting involved and taking action. These plans will vary from one employer to another, so you should first check with your employer's benefits department for full details about the specific plan(s) available to you.

Make the most of retirement savings opportunities offered by your employer:

  • Don't Wait - Participate

    The Bureau of Labor Statistics' 2005 National Compensation Survey found that 22% of workers with access to a defined contribution plan do not participate in that plan. These people risk the chance that they'll reach retirement with little or no retirement savings. Even if the paperwork seems complicated or the investment choices seem intimidating, it is important to choose to participate as soon as you can so that your savings have time to grow.

    Many defined contribution plans also have "vesting" schedules, meaning that while the employer may contribute a "match" to your contributions, you will not be "vested," or own those matching contributions, until a certain period of time passes. Vesting schedules apply only to employer contributions - amounts contributed by workers are always 100% vested. Vesting schedules generally take into account only the length of employment completed after you begin contributing to the plan, not from the date you were hired by your employer. If there is a vesting schedule with your employer's plan, that's all the more reason to begin to participate in your retirement savings plan as soon as possible to start the clock ticking.

  • Max It Out

    If your employer offers "matching" funds for your retirement savings plan, take advantage of this money. Put in enough of your money to get the maximum match from your employer. If you can't afford to put enough of your paycheck into retirement savings to get the full employer match, put as much in as you can afford. Employer matches of 50 cents for every dollar a worker contributes are not uncommon, but even a much lower employer match of 15 cents for every dollar is an immediate 15% return on your investment, and even that 15 cents will grow as time goes on.

  • Mix It Up

    The old saying, "Don't put all your eggs in one basket," applies to investments as well. We've all heard stories of workers who put all or most of their retirement savings in their own company's stock, only to see the company file for bankruptcy, causing the workers' retirement savings to disappear along with their jobs. There are risks associated with all types of investments, and "diversifying" - putting your savings in a mix of different investments and investment types - reduces the possibility that all the investments will perform poorly at the same time.

    According to a 2004 study by the Investment Company Institute, nearly half of defined contribution plan assets were invested in mutual funds, an investment type that includes some diversification of its own. A mutual fund invests in a group of investments, such as a group of stocks, bonds or other securities, and lets investors own a portion of the mutual fund's holdings. Selecting funds that focus on investing with different investment types, different industries or different investment strategies can allow you to further diversify your retirement savings.

    If you don't feel confident selecting investments to start off your defined contribution plan savings, ask your benefits administrator if the plan provides any sample diversification or allocation models. Increasingly, defined contribution plans include "lifestyle fund" options that make it simple to begin saving. A lifestyle fund is meant to be the primary investment in a person's account, with a pre-selected mix of investments and investment types specifically designed for those with a similar retirement target date.

    As some investments will perform better than others over time, leaving more money in some investments and less money in others, it's also good to review and update your retirement savings investments yearly to make sure your investments still have the mix you originally planned for them.

  • Hands Off

    Your retirement savings plan may have options for taking funds out prior to retirement. While these options may sound tempting when a financial emergency comes up, taking money out of your retirement savings plan early may trigger tax payments and penalties. It also stops the growth of your savings, as growth takes time to compound. After you've selected the type of investments you're comfortable holding your retirement savings in for the long term, you want to leave them there and allow them to grow.

    The situation that causes many people to disrupt their retirement savings is leaving one job for another. When you leave an employer, you usually have the option to leave your retirement plan with the old employer or to move the funds out of the plan. If you find yourself in this situation and choose to move funds that have a tax-favored status, make certain you get assistance to have it done properly and in a way that preserves the tax-favored status.

  • Learn More

    If your participation in your employer's retirement savings plan is your first experience with investing, watching how your investments work and hopefully grow will be a great learning experience. Your employer's benefits administrator should also be able to direct you to resources related to your employer's plan. If you want a professional opinion on your selection of investments, seek out a CERTIFIED FINANCIAL PLANNER™ certificant or other financial services professional. The more you learn and understand, the more confident you will be that your retirement savings will be able to support you during your retirement.

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