The End of Investing

Jupiterimages—Getty Images

Experts worry that 401(k)s put too much emphasis on the investing process, do too little to help people plan, and allow participants to be too aggressive during market rallies or too cautious after crashes. Is there a better a mousetrap?

The 401(k) is the best tool you have to save for retirement, but it can be an awfully clumsy one.

In a typical plan, your employer essentially hands you a list of funds and says, “Here, you pick.” Maybe you spend a weekend agonizing over whether to invest in this stock fund that looks for “opportunities for value,” or this other one that goes after “emerging opportunities.” (Both sound great!)

For some, fine-tuning a retirement portfolio becomes a fascinating pursuit; for most, it falls somewhere between tedious housekeeping and an anxiety-provoking puzzle.

The catastrophic market crash of 2008, which took the average 401(k) balance down by 30%, has done lasting damage to the confidence of savers. Even though the S&P 500 had doubled from its low, only 14% of workers at the start of 2012 were very confident about their retirement prospects, compared with 27% in 2007.

So if you’ve thought about just throwing up your hands, you aren’t alone. “People have been given a license for a machine they don’t know how to drive,” says David Booth, founder and co-CEO of Dimensional Fund Advisors, chatting at his firm’s headquarters in Austin.

With $235 billion under management, Dimensional has quietly built a reputation as one of the most sophisticated fund managers in the business. Its low-cost index-like funds have acquired a mystique, in part because they are mainly sold to institutions and clients of fee-only advisers.

Now Booth wants to go after a much broader market of 401(k) savers. And he has a proposition that may surprise you: You should be able to all but ignore your portfolio.

The decisions you must get right are all about planning — how much to save, how much income you’ll need — not investing.

Dimensional’s Managed DC service, which was launched in the U.S. this summer, is an intriguing entry in a small but growing category of managed 401(k) plans. Competitors include the more established Financial Engines and a firm called Guided Choice, recently tapped by Schwab to offer advice built around the brokerage giant’s index funds.

What all the services have in common is that they set up and run a portfolio for each participant in a 401(k) plan, based on his or her age, savings, and income goals. (You can use one of these programs only if your employer makes it an option.)

So when you log on to your plan’s website, you won’t be given a menu of funds you can move money in and out of. That part is out of your hands. Instead, you’ll get online tools that help you see whether your contributions are likely to get you to the retirement you want, and warn you to increase your savings when you are at risk of falling short.

It remains to be seen whether over the long run a custom approach will improve 401(k) savers’ outcomes. Still, the plans are worth your attention, because it’s not just these businesses saying that the 401(k) needs fixing.

For years pension experts have worried that 401(k)s put too much emphasis on the investing process, do too little to help people plan for the income they’ll need, and allow participants to be too aggressive during market rallies or too cautious after crashes.

Understanding the better mousetraps Booth and his competition are trying to build can teach you how to better save for your retirement, regardless of whether you are in one of these plans.

Here are four seriously bright ideas behind what just might be the 401(k) of the future.

BRIGHT IDEA NO. 1: You won’t win by becoming a brilliant investor

It’s not that owning good funds is irrelevant. Over the past 15 years, the best-performing large-cap stock fund beat the S&P 500 index by an annualized 6.2 percentage points. If you happened to pick that winner in advance, then, yes, that would have made a big difference.

Trouble is, over the past decade 60% of actively managed U.S. large-cap funds underperformed the S&P, according to S&P Dow Jones Indices. And the noise of the market often drives fund investors to buy and sell at the wrong times.

From 2000 to 2009 the average fund earned an annual 3.2%. Morningstar data show the return to the shareholders — measured by tracking money flows in and out — was about half as much.

You can work to getting better at investing, but the evidence is that this won’t get you far. For some savers, farming out investment choices would be a relief.

“The majority of 401(k) participants are not particularly informed about investing decisions, nor are they very interested,” says Christopher Jones, chief investment officer at Financial Engines.

For those used to playing a more active role, though, taking a hands-off approach might not be so easy. Managed plans are generally take it or leave it: You can’t swap some of their picks for your own ideas. And you have to pay for the service. Some advisers charge up to 0.6% on top of fund costs; Dimensional uses its own broadly diversified portfolios and charges a flat 0.6%. (That’s besides other possible 401(k) costs for things like record keeping.)

Although the managed services pick the funds you’ll hold, Financial Engines and GuidedChoice do allow you to change your exposure to stocks depending on your comfort level. At the same time, their calculators instantly show how raising your risk could lower your income if markets are poor.

Dimensional takes a more radical approach: It never asks about your appetite for risk. It sets an asset allocation it calculates will give you the best shot at hitting your income goals — a strategy that will vary depending on your savings and time to retirement.

Dimensional thinks risk tolerance is too wobbly a concept. When stocks soar, everyone has a stomach for risk; after losses, many aggressive investors realize that they want out.

“If people answered risk questionnaires accurately, no one would be in equities,” says Michael Lane, head of Dimensional’s retirement business. “We don’t ask questions that at the end of the day don’t matter.”

Do it on your own: If you can’t, or won’t, turn over control of your money, train yourself to mess with it less often. One way to do that is to not stray too far from a moderate asset allocation, perhaps an age-based rule like 100 or 110 minus your age in stocks. That way when the market crashes, you’re less likely to be gripped by an urgent need to act.

BRIGHT IDEA NO. 2: It’s not about hitting “the number”

The way you measure success in a standard 401(k) plan is by getting as close as you can to a savings target, a.k.a. your “number.”

Mathematically there’s nothing wrong with setting a number. Psychologically, though, it’s far too fuzzy: What looks like a huge stash may not be enough to produce the income you need. “Even $1 million doesn’t go that far anymore,” says Olivia Mitchell, a pensions expert at the University of Pennsylvania.

Following the popular 4% rule of thumb would leave you with an initial income of $40,000. Not bad, but even with Social Security thrown in, it may not be living large for someone with a six-figure income before retirement.

On the other hand, some online retirement calculators spit out targets so seemingly high that younger savers could despair of ever reaching them. “We need to get the focus off of cash piles and onto cash flows,” says Alicia Munnell of the Center for Retirement Research at Boston College.

The new 401(k) plans constantly track your progress in terms of your likely income in retirement. For example, you might see a dollar range based on your current savings habits, planned retirement age, and Social Security benefit. They also help you estimate how much you’ll need.

Dimensional, for example, separates that into two buckets: money you need to cover essential costs, like food and health care premiums, and funds for luxuries, such as an annual vacation. That distinction becomes especially important late in your career, as Dimensional decides how much risk to take with your portfolio. (See bright idea No. 4.)

If you have less than a 15% probability of achieving your desired income goal, Dimensional’s software could even force you to alter your plan — by saving more, for example, or accepting a lower future income or later retirement.

But Sherrie Grabot, CEO of GuidedChoice, says that even the simple exercise of showing savers how much income their nest egg will probably generate is powerful. “People understand how much their monthly bills are,” she says. “If the numbers don’t match up, they know they can’t afford to retire. They get it.”

Do it on your own: Managed 401(k) plans generally try to get you to between 70% and 80% of your pre-retirement income, including Social Security.

The free Retirement Income Calculator on the website of T. Rowe Price sets a 75% goal, and is a good way to get a ballpark estimate. If you want to depend less on market fortunes, try plugging in a conservative portfolio, rather than T. Rowe’s suggested allocation, and see how much you’d have to save to make that work.

BRIGHT IDEA NO. 3: And it’s not about watching your balance grow, either

Another consequence of focusing on the pile of money is that checking your balance can make a bear market look like a much bigger setback than it really is, especially for savers 20 years or more from retirement.

Grabot says that stocks could drop 40%, but a younger saver might see only a 5% to 10% drop in his probable income. “That’s a very different feeling,” she says.

How can that be? First, the income you’ll be able to tap in retirement is driven by more than your portfolio. There’s also your Social Security, as well as interest rates, which affect the value of an income-producing annuity you might choose to buy when you retire.

Even more important for the young is the fact that the investment portfolio you have today is just a fraction of the nest egg you’ll be building up with contributions over the rest of your career. And when stocks drop, that means your future contributions are actually buying more shares.

Do it on your own: If you are a couple of decades away from retirement, stay focused on the bigger picture during bear markets.

“You’re getting stocks on sale,” says Christine Fahlund, a senior financial planner at T. Rowe Price. As you get nearer to your retirement date, however, your balance — and what you do with it — will matter a lot more. Which brings us to the last bright idea.

BRIGHT IDEA NO. 4: Take money off the table when you hit goals

As you age, you know that you are supposed to reduce your exposure to equities. That is the key selling point of target-date mutual funds, which make this shift automatically for you. But they’re a fairly blunt instrument.

“Reducing risk should not be about age only,” says David Wray of the Plan Sponsor Council of America, a trade group for employers offering 401(k)s. “It should also be about the accumulation.”

In other words, once you have built up enough to pay for certain key needs in retirement, why keep that money at risk?

Dimensional’s approach to this question is unusual. Within 15 years of retirement, Dimensional looks at your bare-minimum income goal and starts shifting money into a separate bucket of investments that it calculates will provide a 96% chance of hitting that number. (Dimensional stresses that this is not a guarantee.)

Money beyond the essentials can be invested more aggressively. By retirement, much of the essential portfolio will be in funds holding Treasury Inflation-Protected Securities, or TIPS. That idea may be a tough sell these days, with Treasury yields still at crazy lows.

The problem is mitigated, however, for those who plan to put the money into an annuity at retirement, which Dimensional strongly encourages. If interest rates climb, the bond funds will take a hit to their returns, but payouts on annuities will also be higher.

Do it on your own: It’s not easy to replicate a strategy like Dimensional’s on your own. But thinking ahead about how you’ll pay for your essential needs — not the cruise you might one day like to take but the regular grocery shopping and property tax bills that can’t be put off — can help you avoid taking too much risk as you near retirement.

You could easily be retired for 20 or 30 years, so it may seem like you have lots of time to wait out a bad market and capture stocks’ higher long-run return.

Once you’ve stopped working, however, a market drop will be devastating if you’re suddenly forced to turn long-term investments into gas money.

“People have been focusing on the rate of return and how much they can accumulate,” says Lane. That’s what most 401(k) plans, with their emphasis on investments instead of planning to replace income, train you to do.

As you get closer to the end of your career, instead of counting on riding the bull to a successful retirement, you need to start thinking about how you’ll break the fall should you get thrown.


Retirement Saving: Catching up in Your 20s

I’m in my late 20s and am behind in preparing for retirement. What’s the best way to catch up? — Taylor, Winston Salem, N.C

I’m happy to see someone so young so concerned about planning for retirement. But let’s not get carried away here. If you’re still in your 20s, it’s hard to imagine that you could have fallen very far behind.

You’re at the beginning of your career, which means you’ve got a good 35 to 40 years of working, saving and investing ahead of you. So even if you’ve done nada to date, there’s no reason to panic.

That said, you don’t want to put this off any longer, and the best way to get started is to realize from the get-go that the single best way to assure yourself a comfortable retirement is to save as much as you can on a regular basis.

That’s true whether you’re behind and trying to get back on track, or if you’re already on course and want to stay there.

Unfortunately, a lot of people are under the mistaken impression that smart investing is the surest route to retirement security. I suspect that’s because the financial press spends so much time obsessing about the markets and giving the impression that you can easily boost your returns by deftly shifting your money around.

Related: Maxed out Your 401(k)? Here’s How to Save More for Retirement

If only it were so. But the fact is that while investing is certainly important, increasing the amount you save is a much more effective method of improving your retirement prospects.

Speaking of saving, it just so happens that the U.S. Senate has designated this week as National Save For Retirement Week. If you’re into florid legislative language with “whereas this” and “resolved that,” you can take a look at the actual resolution. But if you prefer to do something more practical to jump start your retirement planning, I suggest you do the following.

First, get a handle on how much you should be salting away each year. With retirement still so far off there’s no way to know precisely how much you need to set aside. But you want to at least arrive at a ballpark figure.

When you’re further along in your career, try a more robust retirement calculator that allows you to get a more customized assessment of whether you’re saving enough, how your savings are invested, how much you expect to collect in Social Security and pensions and your planned retirement age. For now, though, a rough estimate is just fine.

Next, make sure you’re taking full advantage of tax-advantaged savings options, as mitigating the tax bite can leverage your savings effort and help you build a larger nest egg. Fortunately, this is a message that appears to be getting through. When asked to identify the best retirement-savings vehicles as part of a recent Wells Fargo Retirement Fitness Survey, 71% of the 1,000 people polled named a 401(k) or IRA.

Related: Should I Quit My Job and Travel?

Clearly, the 401(k) allows you to put away more bucks — a max of $17,500 next year, plus a $5,500 catch-up contribution for anyone 50 or older — plus it has the advantage of automatic payroll deductions and, in most cases, employer matching funds.

But with a current annual max of $5,000 plus a $1,000 catch up, the IRA can also be a powerful savings tool — and you may even be able to do both. If you can still afford to save after maxing out your 401(k) and an IRA, you can move on to tax-efficient vehicles like index funds, ETFs and tax-managed funds.

Once you’ve got the savings side of the equation covered, you can focus on investing. But your aim here isn’t to stuff your retirement accounts with every investment the marketing gurus on Wall Street can come up with. Rather, you just want to create a basic diversified portfolio of stocks and bonds, keep costs low and rebalance once a year so your portfolio doesn’t get too stock-heavy during bull markets or overweighted in bondsshould stocks take a tumble.

Bottom line: You’ve still got plenty of time to bulk up your nest egg, and if you follow the plan I’ve outlined, you should have no trouble doing so. But make sure you started now because if you wait too long you really will fall behind.

MONEY Ask the Expert

5 Tips to Boost Your Retirement Savings

Q. I’m in my mid-30s and max out my 401(k) and a Roth IRA every year. I also invest $4,500 a year in mutual funds. What more should I be doing to prepare for retirement? Should I invest in individual companies in addition to funds? — Brian B., Jacksonville, Fla.

A. Sounds like you’re already taking the most important steps to get on the path to a secure retirement. You’re saving on a regular basis, maximizing tax-advantaged options — you’re even going above and beyond by investing a substantial sum in a taxable account each year.

Assuming all that saving amounts to a reasonable percentage of your annual income — say, 15% or so — I don’t think you need to make any radical changes.

That said, you may be able to enhance your retirement prospects by improving your retirement-planning strategy a bit. The key, though, is concentrating your efforts in areas that are likely to have the highest payoff.

Here’s what I recommend:

1. When it comes to investing, keep it simple. Unless you believe you have unique insights into the financial prospects for specific companies, I’d pass on investing in individual stocks. Without an edge, you’re not likely to outperform the market averages, and you could end up dragging down your returns.

Similarly, ignore the endless variety of niche funds and ETFs that investment firms constantly churn out. Here, I’m talking about funds and ETFs that home in on particular sectors of the market — oil, gas, platinum, gold, currencies, individual foreign countries, etc. — or that employ risky or arcane investing techniques, a la inverse funds and leveraged ETFs. It’s tough to integrate such investments into your portfolio in a coherent way, and they’re ultimately not worth the extra expense and effort.

Instead, focus on building a straightforward portfolio of broadly diversified stock and bond funds that will give you exposure to all areas of the market. For guidance on how to divvy up your money — between stocks and bonds overall and among particular types of stocks and bonds — just plug the ticker symbol for the Vanguard target-date retirement fund designed for someone your age — in your case, the 2040 or 2045 fund VANGUARD CHESTER TARGET RETIREMENT 2045 FD VTIVX -0.3166% — into Morningstar’s Portfolio X-Ray tool. You don’t have to mimic its allocations precisely, but you probably don’t want to stray too far from them either.

2. Aim for lower costs. Your best shot at boosting your returns without taking on additional risk is to invest as much as possible in low-expense funds. Generally, that means looking for stock funds that have expense ratios below 1% and bond funds with expense ratios less than 0.75%. You can do even better, though, by sticking to low-cost index funds and ETFs like those on the MONEY 50 list of recommended funds.

Of course, in your 401(k) you’re limited to the menu of investments offered by your plan. But by perusing the fee disclosure the Department of Labor now requires plan sponsors to provide, you should be able to sift through your 401(k)’s investment roster and choose reasonably priced options.

3. Beware investment pitches based on tax benefits. After investing all you can in tax-advantaged 401(k)s and IRAs, you can plow any extra savings into taxable accounts, as you’re already doing to the tune of $4,500 a year.

Just be careful. Many advisers are quick to recommend variable annuities or life insurance investments for taxable accounts because of their potential tax savings. Problem is, these options typically come with high fees, not to mention a mind-numbing level of complexity.

Related: The Case for Investing in Bonds, Too

A better solution is to stash any saving you do outside 401(k)s and IRAs in tax-efficient investments like index funds, ETFs and tax-managed funds. You’ll likely pay far lower expenses, which will give you a better shot at a higher after-tax rate of return.

4. Save more as your income rises. There’s a natural tendency for people to ratchet up their lifestyle at a faster rate than their paycheck as it grows. But that can lead to problems come retirement time. The reason: As your income climbs, the percentage of your pre-retirement salary that Social Security will replace starts to shrink.

So the more you earn during your career, the more you’ll have to depend on your personal savings to maintain your standard of living in retirement. To avoid having to scale back your lifestyle during retirement, try to increase the percentage of your income you save as your earnings increase.

5. Monitor your progress. Over the course of a career, any number of setbacks — layoffs, market downturns, etc. — can derail even the best laid retirement plans. That’s why it’s crucial to evaluate how things are going and make adjustments if necessary.

You can do that several ways. One is to periodically assess the balance of your retirement accounts relative to your annual income. The important thing, though, is that one way or another you come away with a realistic sense of whether your current saving and investing plan is working and, if not, make the necessary tweaks to put you back on track.

You already appear to be off to an excellent start in your retirement planning. And if you follow these five tips, your chances of making a smooth transition from the work-a-day world to your post-career life should be just as upbeat.


New 401(k) Tax Break Is Just around the Corner

People with 401(k) plans got a nice tax break last month, but they’ll have to wait for some red tape to be cleared out of the way before they can actually take advantage of it.

Thanks to a provision in the Small Business Jobs Act, which President Obama signed into law last month, 401(k) plan participants will be permitted to roll their accounts over into Roth 401(k)s. The change will give many people with defined-contribution plans greater flexibility in paying taxes; while holders of conventional 401(k)s deposit pre-tax dollars into their accounts and pay taxes upon withdrawal, Roth 401(k) holders fund their accounts with after-tax dollars but withdraw the money tax-free. (In both cases, any investment growth within the account comes free of taxes you don’t have to pay taxes as your investments grow within your account.)

The new option is similar to that already enjoyed by conventional IRA owners, who have leeway to convert those accounts into Roth IRAs. And the tradeoffs are the same, too: As with conversions of traditional IRAs to Roth IRAs, 401(k) holders converting to a Roth 401(k) will pay taxes upfront on the amount of money they convert.

Thus, the Roth option is best for people who expect to eventually jump into a higher tax bracket (or just want to hedge against the possibility that income tax rates will rise), since account-holders who roll over now won’t have to pay taxes on money they withdraw later.

It would be great to be able to make the rollover this year, but recent public comments by a Treasury official suggest that if it happens, there will be a last-minute crunch in December. Speaking at a convention of pension professionals, associate benefits tax counsel William Bortz indicated that the government was hurrying to give guidance on how to implement the new law, but that plan sponsors should wait for the guidance to come out before allowing the rollovers.

That’s not the only catch. Among the conditions that have to be met for you to enjoy this new rollover option, your employer’s retirement savings plan must offer a Roth 401(k). Nearly a third of employers currently offer plans with Roth 401(k)s and a quarter more are likely to add the feature, according to Hewitt Associates.

Other restrictions within your plan may prevent you from rolling over portions of your 401(k) before certain age or time limits, but the new law may encourage employers to make distribution rules more flexible, since employees who want a Roth option might then be less likely to pull funds out of their 401(k).

If you are interested in a conversion, you’ll need to talk to your employer about whether your plan will allow for the 401(k) to Roth 401(k) rollover and — if so — what additional restrictions might apply, says tax and elder law expert Richard Kaplan, a professor at the University of Illinois.

The new rule, built into the Small Business Jobs Act of 2010, was an unexpected provision included, in part, to generate short-term tax revenue to offset the costs of other tax breaks in the bill, says Kaplan. “The result is that it’s caught many people by surprise,” he says, “including plan administrators.”

Find Money on Facebook.


Reality Sinks in for 401(k) Investors — and Providers

It’s taken a few years, but Americans are finally giving up on the dream of an early retirement. A new poll by the Gallup organization found that for the first time more Americans say they will work longer than age 65, rather than call it quits in their 50s or early 60s.

The change is dramatic. More than a third of those surveyed said they would retire after 65, compared with just 12% in 1995, which was the first year Gallup began asking that question. Some 29% still intend to retire before age 65, but that percentage has dwindled from a high of 50% in 1996. Another 27% said they would retire at age 65.

Clearly, the financial setbacks from the market crash and recession are forcing Americans to realize they need to work longer.

Also playing a role: the higher age limit for claiming full Social Security benefits — at least 66 for those born between 1943 and 1954, rising to 67 for those born in 1960 or later. Still, as another Gallup poll found, more Americans are counting on Social Security as their main source of income than before — some 34% vs. 27% in 2007.

Given the modest level of income that Social Security provides, however, the majority of workers continue to rely on their employer plans for retirement security. Some 45% of those surveyed expect their 401(k) plan or IRAs to be their biggest source of income when they call it a career — but that’s down from 52% in 2007.

As critics have long pointed out, 401(k) plans, whose returns depend largely on the whims of the stock market, need major reforms to make them effective for retirement savings. That’s something even 401(k) providers are beginning to acknowledge. A newly released study by Wells Fargo found that employers have been slow to take full responsibility in helping their workers achieve a financial secure retirement.

Only 45% of employers surveyed by Wells Fargo said that the “primary” goal of offering a retirement plan is to “provide employees with the means to achieve a financially sound retirement.” Instead, the majority (51%) say the main reason for offering the plan is “provide competitive benefits to attract and retain employees.”

When asked about “the greatest challenge and concern” facing their plans, only 19% of employers answered “providing employees with the financial ability to retire.” By contrast, some 26% cited market volatility’s effect on account balances.

The people at Wells Fargo see retirement as a shared responsibility between individuals, employers and the government. And they think that all parties can do more to ensure its success.

“Many employers don’t see it as their responsibility to make sure their workers are on track to a secure retirement,” said Laurie Nordquist, director of Wells Fargo Institutional Retirement and Trust, in a recent interview. “And many also are concerned about legal gray areas in what they can offer in terms of advice and guidance.”

Nordquist, along with fellow Wells Fargo director Joe Ready, say that Washington could make a few key reforms that would motivate employers to improve their plans. Among them: offering clear rules permitting advice in 401(k) plans (proposals for permitting advice have been bottled up in Washington), encouraging guaranteed income options at retirement, and providing a tax break for employers on matching contributions.

Are you planning to retire later than age 65? And what changes in your 401(k) might help you retire sooner? Let us know in the comments section below.

Follow MONEY on Twitter at


The Market Boomed… and 401(k) Investors Sat on Their Hands

A new survey out today from Hewitt Associates finds that 401(k) investors haven’t been very busy lately. Just 16% of participants made any kind of fund transfer in 2009, vs. about 20% the year earlier. In other words, relatively few people noticed the 27%-return rally in the works and said to themselves, “Hey, I should jump back into stock funds.” That’s good… and it’s bad. And it’s an opportunity to make 401(k)s work better.

Why it’s good: Chasing hot-performing funds or sectors is a pretty-sure fire way to lower your return. But the majority of investors didn’t do that.

Why it’s bad: As Hewitt notes, the numbers also mean that the majority of investors didn’t move to rebalance their portfolios. That means that as the value of the stocks in their portfolio grew, they were more exposed to equities (as a percentage of their overall portfolio) at the end of the year than they were at the beginning. Trimming back on stocks to get back to your original asset allocation can help reduce risk, and it gives your portfolio a slight (and smart) contrarian tilt, because it forces you to sell what’s hot and buy what’s not.

How to make 401(k)s better: If employers and policymakers want people to get more out of their 401(k)s, investors who underreact aren’t as big a problem as investors who overreact. It’s hard to convince someone who thinks that frequent trading is helping his return that he’s wrong about that — although he probably is. But for most investors, it seems, inertia plays a huge role in their investment decisions (or, more precisely, their non-decisions). That suggests that you can do a lot of good just by nudging people into low-cost, well-diversified investments at the very beginning.

Follow MONEY on Twitter at


Money Makeover: Fix Our Mix

Robert And Sharon Nelson have no trouble saving. They’re setting aside nearly 14% of their income for retirement and have amassed more than $250,000 overall. And since Robert is an instructor at Penn State, the couple’s 4-year-old daughter, Olivia, is nearly set for college — the school will pay 75% of her tuition if she attends.

But Robert, 40, and Sharon, 37, a sales commission manager, want to retire once Olivia is out of school, and they’re not sure if they’re on track.

For one thing, the Nelsons don’t know whether their money is in the right mix of investments.

“It seems like we’re doing stuff, but I don’t know if it’s the right stuff,” Robert says.

Adding to their challenge: The Nelsons have four 401(k)s and one 403(b) plan at various employers, making it hard to keep track of their overall allocations. Robert has a great state pension that will make it easier to retire early, but he knows they’ll need to change their investing plan to make up the rest.

The solution

1. Cut back on cash.

The Nelsons have $80,000 in emergency cash. That’s 20% too much, says adviser Lee Pelko of Lancaster, Pa. Plus, only $15,000 of their rainy-day fund needs to sit in savings and money-market accounts. The rest can go into higher-yielding options like laddered CDs and short-term bond funds.

2. Boost equities.

A 50% stake in stocks won’t let them retire early. Pelko suggests raising it to at least 60% and investing in small-cap and foreign stock funds. Though Robert has the security of a pension, that’s as aggressive as he wants to be.

3. Consolidate old 401(k)s.

By rolling over old accounts into one IRA, they can simplify while increasing their investment options.



What Your Boss Isn’t Telling You about Your 401(k)

If you were to go by the headlines, you might think happy days are here again for 401(k) investors. Employer matching contributions are coming back. Account balances have recovered (mostly). And workers are continuing to save. So, you can look forward to a smoother ride from here to a dream retirement, right?

If only. Truth is, even with a newly restored match and stronger stock market, 401(k) retirement plans still won’t enable most workers to build the retirement nest egg they need. And if you don’t believe that, chances are your boss probably does.

Consider these recent findings from a survey by benefits consultant Hewitt Associates: Only 54% of employers are highly confident or somewhat confident that their employees will retire with “sufficient retirement assets.” That’s down from 66% in 2009. And only 18% are highly confident that their workers will “make their retirement income last for the rest of their lifetime.”

Why are company execs having so many doubts about their own 401(k) plans? In a survey last year by benefits consultant Mercer, employers cited some of the biggest obstacles to retirement security: the failure of workers to participate in their plan, participants not saving enough, and the markets being too volatile to support adequate savings.

For workers, as well as retirement policy experts, these employer concerns should be raising a lot of red flags. After all, unlike many academic and think tank critics of the 401(k), employers have an inside view on how well their employees are preparing for retirement. And if the boss lacks confidence in the 401(k), there’s little reason for employees to have faith in these plans.

So are worried employers rushing to fix the faltering 401(k) system? Um, no. The weak economy is one reason. But the bigger issue is that despite their fiduciary duty as 401(k) plan sponsors, many employers don’t view their workers’ retirement security as their responsibility.

As the Mercer survey found, some 25% of employers, say that their workers bear the bulk of the responsibility for their own retirement saving. Not so coincidentally, nearly 50% of companies that halted their matches last year fell into this group.

Only 7% of companies see retirement security as mainly their responsibility, with the remaining 68% saying the duty is shared between workers and employer.

Washington may eventually try to apply some fixes for the 401(k). The Labor Department, for one, is expected to issue new rules for improved 401(k) fee disclosure. And the SEC is considering reforms for target-date fund marketing.

But even if those reforms are enacted, the big challenge remains: when it comes to building a retirement nest egg, you’re basically on your own. So if you’ve got a 401(k), max it out. And save outside your plan too.

Follow MONEY on Twitter at

Your browser, Internet Explorer 8 or below, is out of date. It has known security flaws and may not display all features of this and other websites.

Learn how to update your browser