7 hot 401(k) trends - by Liz Pulliam Weston (1)

In the beginning, safety features weren't a standard part of automobile design. It took decades for car manufacturers to introduce things like seat belts, collapsible steering columns and crush zones on mass-produced vehicles.

Likewise, 401(k)s weren't originally designed to save investors from themselves -- or from run-ins with greedy plan administrators or a malfunctioning marketplace. But a couple of decades of experience in seeing how workers go wrong with their plans is starting to alter how workplace retirement plans function.

Many of the hot trends are designed to fix some of the most common 401(k) blunders, such as not signing up, taking too much or too little risk and cashing out early. Others are a backlash against high fees and scandals gripping the mutual-fund industry. The last -- the so-called Roth 401(k) -- is an intriguing new twist that may be coming to a 401(k) plan near you … someday.

Here are the trends, the caveats and suggestions for what your game plan should be:.

Making retirement saving automatic

Nearly 30% of eligible workers fail to sign up for available 401(k) plans, a fact that frustrates company executives in two ways:

• Nonparticipants are shortchanging themselves and their futures. According to research by Aon Consulting, these no-shows leave on the table a collective $30 billion of unused company matches and increase the chances they won't have enough money to retire comfortably.

• Low participation among rank-and-file workers can limit how much higher-paid workers are allowed to contribute to their retirement funds, thanks to IRS rules that govern how 401(k)s work.

A growing number of companies have decided to harness workers' inertia by making 401(k) enrollment automatic: Employees have to opt out if they don't want to participate.

The typical plan starts the automated contribution at 3%, and some increase the deduction by 1% every year. Employers that have tried the option say it boosts participation to nearly 90%, said Ed Ferrigno, vice president of Washington affairs for the Profit Sharing/401(k) Council of America, a trade group.

That means, of course, that participating companies are shelling out more in matches, something not all companies are willing to do.

Automatic enrollment plans "are so successful at increasing participation that you have to come up with money for a lot more people," Ferrigno noted. "It's the true believers who are doing this."

About 25% of large-company employers (median workforce: 10,000 employees) have put their plans on automatic, according to Hewitt Associates' 2006 survey of retirement trends. Another 23% said they were very likely to automate enrollment by the end of the year.

"Automatic rebalancing" is another feature designed to reduce retirement savings hassles. Offered by 27% of large employers, this option allows participants to select a portfolio of mutual funds that is then rejiggered as often as every quarter to return it to the original asset weightings.

The caveat: Many of the companies automating enrollment are putting their new hires into extremely conservative investment options, typically money markets and stable value funds. That's no way to earn the kinds of returns needed to beat inflation over time. But Ferrigno says the companies want to avoid lawsuits by workers who may feel tricked if their automatically deducted contributions suffer a loss in the market.

Also, a 3% contribution rate isn't high enough to ensure a comfortable retirement, yet only 17% of the companies that enroll workers automatically also offer "automatic escalation" to increase contribution rates over time.

Finally, auto-rebalancing can be a great idea, but participants still need to review their asset weightings occasionally to ensure they still make sense. In particular, it's usually wise for participants to reduce their exposure to stocks as they approach retirement.

Your game plan: If you're one of those high-paid workers whose ability to contribute is being restricted by your nonparticipating colleagues, urge your employer to consider this option. If you're one of the employees who has been signed up automatically, make sure you move most of your money into a stock fund so you can take advantage of long-term growth. Also, consider boosting your contributions each year until you're contributing the maximum allowed. If you use an auto-rebalance feature, make sure you revisit your asset-allocation strategy at least every few years and make any necessary tweaks.

Simplifying your investment choices

When the stock market was hopping in the late 1990s, giving workers more investment choices was all the rage. Some companies introduced dozens of new options and a few even offered "brokerage windows," which let employees invest their 401(k) money in an almost unlimited array of funds and individual stocks.

Hard-core investing buffs loved having all the choices -- and promptly drove up plan costs with frequent trading. Many workers, though, looked at all the options and just froze.

Although employers aren't necessarily disassembling their complicated plans, the average number of available options has leveled off at 14, and 65% of the companies Hewitt surveyed now offer some kinds of "life cycle" funds, which tailor investments to a person's age, or "target maturity" funds, which make investments geared to a worker's planned retirement date. In general, these funds automatically rebalance investments and gradually reduce exposure to stocks as the employee approaches retirement.

"It's really a sea change from where we were as an industry in the 1990s," when plan sponsors piled on the options, said Lori Lucas, Hewitt's director of participant services. Automatic investing options like life-cycle and target-maturity funds "are much easier for participants to use."

The caveat: Unfortunately, many workers still don't quite get the all-in-one nature of a life-cycle fund. They may select it as an investment option but then contribute to a number of other options as well, which undoes much of the benefit. Some of the target funds get a little too conservative at the end.

Your game plan: If you're tired of messing with your 401(k), use the life-cycle, target-maturity or automatic rebalancing options if your company offers them; if not, ask if they can be added. Or just invest in the balanced-fund option you're probably offered; the 60% stock and 40% fixed-income mix is often a good default option, and it's automatically rebalanced without any effort on your part.

Red-flagging company stock

The temptation to overdose on your own company's stock can be strong. Familiarity breeds comfort. Many 401(k) investors think (wrongly) that their own companies' shares are safer than a diversified mutual fund.

The dangers of such thinking have been made abundantly clear by several high-profile corporate bankruptcies in the last several years. The most notorious was Enron, where company shares made up about 60% of workers' 401(k) assets. Its bankruptcy simultaneously wiped out the jobs and retirement plans of thousands of employees.

Many companies have responded by removing their own shares as an investment option. While 55% of the plans Hewitt surveyed in 2001 included company shares, the proportion dropped to 49% in 2003 and 43% in 2005.

A few of the companies that offer their own shares restrict how much participants can buy. Some 17% of companies now impose such restrictions, compared to 14% in 2001.

The number of companies emulating Enron's approach -- by matching contributions with company stock, offering company stock as an additional investment option and restricting employees from selling company stock -- shrank to 8%, compared to 11% in 2003.

The caveat: When shares are available, employees are still inclined to overindulge. In plans that offer company stock, 1 in 4 workers invests half or more of their balances in such shares.

Your game plan: No one company, including your own, should make up more than 10% of your retirement portfolio. If your company makes its matching contributions in its own shares, you may already be exceeding that limit. If so, take advantage of any opportunities you're given to sell off those shares and reduce your exposure.

Containing the fees

The mutual-fund scandal, in which major fund providers were accused of helping a handful of favored investors profit at the expense of millions of others, has finally prompted some employers to get serious about the fees they and their workers are being charged for 401(k) accounts, Ferrigno said.