Expert's Guide: Protect Your 401K

April 3, 2008— -- Millions of Americans are going to receive their quarterly statements for their retirement investments starting this week -- a daunting fact given the market roller coaster ride all of us have been on the past couple of months. Aside from not opening your statement, here is what you need to know to put your mind at ease about your hard-earned retirement dollars.

What is a 401(k), or defined contribution plan, and how does it work?

A defined contribution plan, the catchall category for a 401(k), 457 or 403(b) plan is an employee-sponsored retirement savings vehicle that allows you to put away pretax dollars for your retirement. Typically, employees are given a number of investment options to choose from and can elect how they would like to invest their money. Employees also usually determine how much money they would like to defer from each paycheck. Their contributions and earnings then grow tax free until the assets are withdrawn, at which point they are taxed as ordinary income. A 401(k) is a terrific vehicle to save for retirement not only because of the tax savings but because of the fact that almost 80 percent of employers will match a portion of your contribution.

My biggest worry -- and one that actually keeps me up at night -- is not the choppy market but the fact that people are not taking advantage of 401(k) plans. Almost 25 percent of all employees who have access to employer-sponsored retirement plans do not participate. It is pretty simple -- if you do not put the money away now, there will not be enough for you to live on later. And if your employer offers a match, not contributing is like leaving free money on the table.

How has the recent stock market decline affected most people's 401(k) accounts?

Generally speaking, a typical investor with a broad range of mutual funds is down about 9.5 percent. Interestingly, although it seems like all the bad economic news is coming from here in the United States, international markets are actually worse off. Stocks have fallen more than 15 percent in Europe and are down more than 20 percent in India and 30 percent in China. The message here -- there are few safe places to hide in this really trying market.

40s: 80 percent stocks and 20 percent bonds

50s: 75 percent stocks and 25 percent bonds

60s: 70 percent stocks and 30 percent bonds

70s and older: 50 percent stocks and 50 percent bonds