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On tap: 401(k), version 2.0
Your retirement plan's a-changin' -- here's what you need to know
July 22, 2005: 11:48 AM EDT
By Jeanne Sahadi, CNN/Money senior writer

NEW YORK (CNN/Money) Coming soon to a retirement plan near you: big changes.

If you have a 401(k) or 403(b) at your job, you may be seeing some substantial differences in your options over the next six months or so.

Specifically, your employer may simplify your plan to make investing easier and automate a number of actions designed to save you from yourself.

At the same time, employers also may add a complicating twist to your plan which will present you with a choice that may not be as advantageous as it may seem at first.

Here's a primer on what to expect if your employer tells you that your 401(k) will change:

401(k): The simple life

Research has shown that those of us eligible to participate in our companies' 401(k) plans are not a very proactive bunch.

We're slow to join the plan, feel overwhelmed if faced with too many investment choices, and rarely, if ever, rebalance our portfolios. Plus, few of us even contribute the maximum allowed, or regularly increase our contributions.

So employers are moving toward a streamlined 401(k) that will have a number of default options designed to improve workers' chances of building a solid nest egg.

The changes include far fewer investment choices, automatic enrollment, automatic rebalancing and automatic deferral contribution increases.

See the full story here.

Roth 401(k): A merger of unclear merit

Starting in 2006, the law will allow employers to offer a new option in 401(k) plans: to contribute after-tax money that will grow tax-free.

Currently, your 401(k) contributions are pre-tax, meaning you get a deduction the year you make the contribution, and you pay income taxes on your contributions plus earnings when you retire.

The new option is called a Roth 401(k) -- or a Roth 403(b) if you work for a non-profit. It's not a separate plan from your existing 401(k), but rather a new element to it.

So you will be asked first how much of your gross income you'd like to contribute to your retirement plan -- say, 15 percent. And then of that, you'll indicate how much you'd like to put in the pre-tax portion of the plan and the after-tax portion say, 7.5 percent in each.

The new element is similar to a Roth IRA, which also lets savers invest after-tax money that grows tax-free. But it differs in significant ways.

And while the promise of tax-free growth may seem hard to resist, deciding to take advantage of the Roth 401(k) is hardly a no-brainer.

See why here.  Top of page


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