401(k) Inertia: Not All Good News

Now that we're a year past the depths of the epic bear market, reports are rolling out showing exactly what Americans did and didn't do during the crash.

The seemingly good news is: we didn't do much. Vanguard's report of 401(k) activity during the market crash found that among more than 3 million accounts, about 3 percent of plan participants stopped making contributions altogether in 2008 and 2009, not seismically more than the 2.5 percent that stopped saving during the relative calm of 2007. And less than 20 percent of 401(k) accounts registered one or more trades during the market tumult.

Over at Schwab the news was that both participation levels and contribution levels among the 1.3 million accounts it handles hadn't changed much either.

401(k) Inertia: Not Always a Good Thing Just because we didn't head for the exit in droves isn't exactly cause for celebration. The fact that most Americans did nothing is actually pretty bad news.

Even before the market meltdown, our savings habits left a lot to be desired. Below is the state of America's retirement savings--in the halcyon days of 2007. That is, before the crash.

Check out the pre-retiree crowd (the far right column): More than half of folks nearing the finish line for accumulating retirement savings had pre-crash nest eggs of less than $100,000. Working back from a 4 percent withdrawal rate in retirement that's at best going to generate an initial monthly income stream of $333 or so. I'm guessing that's not going to cut it for most of those pre-retirees. And in the wake of the bursting of the massive real estate bubble, it's not like home equity is going to be much of a Plan B for generating retirement income for many folks.

That's a whole lot of incentive to be socking away more in 401(k)s. Yet so far, we aren't seeing an appreciable pickup. Granted, the personal savings rate has jumped since 2007. But it's been more through debt reduction, not adding to savings. Reducing what you owe is at best only half of the equation. You can't live off of no/lower debt. You still need to have income in retirement too, and that comes down to saving more.

Your Employer Isn't Helping Matters
Your boss is partly to blame for your lack of sufficient savings. The much ballyhooed push toward auto enrollment in 401(k)s has created a costly unintended consequence: 401(k) auto enrollment typically sets a dangerously low default contribution rate of just 3 percent. That's a far cry from the 10 percent to 15 percent financial advisors recommends to have a shot at a comfortably retirement. Yet employers have been slow to alter their plans to include auto-escalation feature that would make sure participants (slowly) increase their contribution rate over time. According to the recent Schwab 401(k) survey, of the 35 percent of their plans that now offer auto-enrollment, only about one-third have added an auto-escalation feature.

You don't have time to wait for your boss or Washington to get this right. Here's how to fix your 401(k) right now:

• Create your own auto-escalation feature. Boost your contribution rate by 1 percentage point asap. There is absolutely no way you can't adjust to such a small dip in your take-home pay. Especially if you are contributing to a Traditional 401(k); every dollar contributed reduces your taxable income. Repeat this slow escalation every six months until you get to at least a 10 percent deferral rate.

• Play Catch Up: If you're at least 50 years old, you can literally make up for lost time: in 2010 you are allowed to contribute a maximum of $22,000 to your 401(k); that's $5,500 more than folks younger than 50.

• Bug your employer to add auto-escalation. Not because you need it; but because you need to worry that if your fellow Americans don't start saving more for retirement, there's an increased likelihood we will all collectively pay up through higher taxes to support those folks down the line.

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