Participate In Your Retirement Plan

If you have a 401(k) plan it has probably taken a beating in the past year.

As of late, reporters (especially CNBC’s Rick Santelli) have referred to 401(k) plans as 201(k) plans because of their shrinking values. The poor performance is no laughing matter, but neither is the poor participation by American workers.

Photo by ralphunden, Courtesy of flickr

I found the following statistics on retirement plan participation in Vanguard’s How America Saves 2008.

Approximately half of American workers have  a retirement plan.

Approximately 66 percent of Americans participate in 401(k) plans.

Only 10 percent contribute the maximum amount allowed.

Sixty percent of employees cash out all or a portion of their 401(k) when they change jobs.

Note: These figures cover defined contribution plans administrated by Vanguard.

Let’s back up for a moment and talk about what a 401 (k) plan is.

A 401(k) plan is a defined contribution (DC) plan offered by an employer. “DC” plans allow employees to select the amount they wish to routinely invest in their retirement plan.

The desired amount is deducted from the employee’s pay each period. Employees can usually choose from a variety of assets (most likely mutual funds) to invest in. Taxes are deferred and paid when the money is withdrawn from the plan.

Since the markets are down, 401(k) plans have suffered and many people are upset. I understand why because my retirement plan has suffered, too. But, I try to find a bright side by remembering a couple of things:

1. Losses are not realized – Technically, you haven’t lost anything if your my money is still invested in the plan. You only lose now if you cash out now.

2. Losing some money is better than losing it all - Ask yourself: If you hadn’t invested in the plan, what would you have done with the money? Perhaps, you would have saved it or maybe you would have spent it all. In the latter case, even if your plan’s value has fallen, you would still have more money than you would have had without the plan.

3. A plan encourages routine saving – Making a habit of saving or investing is a positive step in the right direction.

I know it is hard to see the bright side in the face of grim account balances. Hang in there.