(FORTUNE Magazine) – Meet Venisha Johnson, 401(k) dropout. Johnson, 43, a payroll specialist at Minnesota-based health-care group Allina Hospitals & Clinics, joined the company in August 2000 but stopped contributing to her defined-contribution retirement plan two years later. As a single mother of three, "I thought I didn't have the money to do it," she recalls. But it wasn't just that. "I didn't know what choices to make," she says. "I was never taught anything about retirement. I felt I was doing it for no reason." She got letters from the company asking her to re-enroll, but she didn't understand them. In an added irony, Johnson at one point worked in Allina's call center, dispensing retirement advice to its 22,000 employees--advice she pointedly refused to follow herself.

Johnson may have felt alone at the time, but her situation is hardly uncommon, and it illustrates much of what's wrong with 401(k) plans today. The accounts have a key advantage over traditional pensions: The money in them is yours, so you can take it with you when you switch jobs, and if your company goes into bankruptcy, your plan is not imperiled. But there's a catch: With a 401(k), it's up to you, not your company, to invest your money and manage your account. And Americans have not always proved to be good custodians of their own finances. About a third of eligible employees simply don't participate, many of those who do have not managed their nest eggs wisely, and about half of us don't roll our money over when we leave a job. What's more, some well-meaning tweaks devised over the past decade to improve the situation have had the opposite effect.

As a result, many of the 76 million baby-boomers who will downshift into retirement over the next two decades are woefully unprepared. More than half of today's 55-year-olds have less than $50,000 in their defined-contribution plans, according to research from McKinsey & Co. Says Alicia Munnell, a Boston College professor and author of Coming Up Short: The Challenge of 401(k) Plans: "These plans have shifted all the responsibility and risk from the employer to the individual, and people make mistakes every step of the way. Even I do."

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To help employees do better, companies large and small are recasting their plans. The changes include automatic enrollment, a reduction in the number of funds offered, the use of "lifestyle" funds tailored to employees, and advisory services. But even though they're designed to simplify your life, they can be daunting to digest. Here's a guide to the latest developments.

AUTO SIGN-UP. Participation rates for 401(k) plans plateaued at around 75% ten years ago. And less than half of eligible workers in their 20s participate, according to benefits giant Hewitt Associates. The answer? Automatically enroll employees, which 19% of big companies already do--among them Hewlett-Packard, J.C. Penney, and Motorola. An additional 28% say they plan to add this feature soon. Allina, for one, is extending its automatic-enrollment feature to current employees at the start of next year. Once enrolled, employees can always choose to drop out, but few do.

LESS IS MORE. Simply getting employees to start setting aside money for retirement, though, is not enough. An alarming percentage of participants put too much money into money-market and bond funds, which seem safe but almost guarantee that you won't earn enough to retire on. Part of the reason for that excess of caution seems to be too much choice. When 401(k) plans first crawled out from an obscure section of the Internal Revenue Code in 1981, they offered a bare-bones menu of investments. Over time, employers started providing additional options. But choice taken to the extreme can have a paralyzing effect. A study by Columbia University professors Sheena Iyengar and Wei Jiang found that participation in 401(k)s dropped 2% for every ten options offered. Not only that, but as the number of mutual funds increased, participants were more likely to stash their cash in money market and bond funds--a phenomenon Iyengar and Jiang call "extremeness aversion." Plan sponsors have finally recognized that less is more, and in 2005 the average number of investment options offered (14) did not rise for the first time since Hewitt began analyzing plans.

THE ONE-FUND SOLUTION. Increasingly those investment options include all-in-one lifestyle funds, which hold a mix of stocks and bonds based on the participant's age or risk profile. This mix is rebalanced over time, so financial advice is essentially embedded in the product. Lifestyle funds emerged in the mid-1990s but have exploded onto the scene of late: Fidelity's lifestyle fund family, dubbed Freedom, is now available in 78% of the plans it administers, up from 51% in 2001. Management fees are not that steep either--in fact, in May, Fidelity nixed the 0.08% fee it had charged for the Freedom funds. At the Chrysler Group in Auburn Hills, Mich., senior retirement and savings manager Jim Bante has added five lifestyle fund portfolios, ranging from conservative to aggressive, which automatically rebalance every quarter. But only 14% of the plan's 80,000 participants have taken advantage of them so far.

ADVICE IS UP. If auto-enrollment and lifestyle funds don't do the job, companies like Chrysler can choose to bring in the pros. Professional, third-party management of 401(k) plans is an even hotter trend than auto-enrollment, according to David Wray, president of the Profit Sharing/401(k) Council of America. According to Hewitt, 37% of plan sponsors offer third-party investment advisory services, which can include online advice or one-on-one counseling, up from 18% in 2001.

Chicago-based ProManage, one of the first firms to hang out a shingle in this arena seven years ago, will probably double its assets under management to $12 billion by next December, according to CEO Carl Londe. What ProManage offers clients like Allina is a "lifestyle fund on steroids," according to Lori Lucas, director of participant research at Hewitt. While lifestyle funds come from just one family of funds, like Vanguard, ProManage can run the gamut of investment options and better tailor an option for employees. "Someone is going to help me now," raves Johnson. "I am so excited!"

Of course, all this expertise comes with a price--one that's too steep for several retirement gurus. "The big issue is, What are you getting, and what is the cost?" says industry pioneer Ted Benna, who designed the first 401(k) plan in 1981. "I'm seeing costs [for advice] ranging from 100 to 150 basis points on top of all the other fees, which is a tough hurdle to overcome. I'm not convinced that there is enough added value vs. just doing lifestyle funds." Chris McNeil thinks it's worth it, though. McNeil, benefits director at New England retail chain Jordan's Furniture, brought in 401k Toolbox, a service from investment advisor PMFM, which offers Jordan's employees daily management of their accounts at a cost of 1.25% of assets. Of Jordan's 1,350 employees, 100 have signed up since it was launched in June.

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Discouraging employees from holding company stock is a key goal of 401(k) reformers. Despite the meltdowns of Enron and WorldCom, which highlighted the dangers of investing in the same company that signs your paycheck, company stock still constitutes too large a portion of most 401(k) balances, experts say. In plans that offer company stock, about one in four employees have half or more of their total 401(k) balance invested in it, according to Hewitt. The most effective way to address the problem? Just say no. This year Hewitt found that only 43% of big companies offered their own stock, down from 55% in 2001.

Another pitfall is that so many employees fail to roll over their balances when they switch jobs. Over half of participants (55.2%) cashed out lump-sum distributions when they changed jobs, according to the Federal Reserve's 2001 Survey of Consumer Finances. Some of those cashouts were cases where departing employees with small balances give no instructions, and employers simply wrote them checks--a process known as a "force out." New regulations from the Department of Labor make it harder for employers to close small accounts.

Of course, these changes won't have much impact if nobody knows about them. And some benefits managers continue to use outdated, boring, and downright confusing methods of communicating with plan participants. Boston College's Munnell, no financial slouch herself, recalls getting a letter from her employer about her 401(k) that even she couldn't decipher. To improve the flow of information, some companies are now targeting specific groups of employees (nonparticipants, those 55 and older) with tailored messages. Chrysler used animated e-mails with fireworks and money falling from the heavens to boost plan participation last year. Sometimes a simple seminar does the trick. Allina held a meeting last month to unveil the changes to its plan. Johnson was there, and she says she was shocked to learn just how much money she was sacrificing by not contributing to her plan. "It made me think, Oh, my God, I could have all this? I woke up to reality." As more companies institute much-needed changes, expect more great awakenings in the months ahead.

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