(MONEY Magazine) – Have you taken a look lately at your 401(k) retirement plan? Well, look closer. It's probably no longer the sleepy three-fund offering you signed up for. Driven by new technology, savvy administrators and activist employees, major 401(k) plans have upgraded more frequently than Microsoft Windows. The typical offering today sports at least 10 investment options and often includes such formerly exotic fare as lower-cost institutional funds, higher-risk sector funds and self-directed brokerage accounts. Participants also are getting cutting-edge Internet services, including personal financial advice. Says Martha Priddy Patterson, director of employee-benefits policy at Deloitte & Touche: "We have graduated into the next generation of 401(k) plans."

If your company's offerings seem stuck in a generation gap, don't despair. "Changes usually start with the largest plans," explains Sean Hanna, editor of an industry website called 401(k)Wire, "but they eventually work their way down to the smaller plans." Meantime, keep pushing for improvements at your company (we offer tips on lobbying later in this story), and know that employers these days are quicker than ever to improve their plans, if only because it will help them attract and keep the best workers.

Also recognize that along with the expanded choices and whizbang technology comes greater responsibility. To make the most of the new 401(k) plans, you have to work harder. That means sorting through broader and sometimes more complex menus of mutual funds, mastering the new software programs and regularly rebalancing your account. Unfortunately, too many employees haven't even maximized their old plans--some 80% haven't rebalanced since they first signed up, studies show. But here's an incentive: A few necessary tweaks to your account, such as switching to lower-cost funds, can boost your nest egg by hundreds of thousands of dollars by the time you retire. (See the chart at left.)

That's what small business owner Larry Borman realized. The president of Tetra Dynamics, a dental lab with 48 employees in West Babylon, N.Y., he set up a 401(k) in 1993. But last year, when a worker tried to withdraw money, Borman discovered that Tetra's plan was invested in high-cost individual variable annuities, which carried stiff surrender charges. Borman, who concedes he didn't know much about 401(k)s when he started the plan, searched for a better option--and soon found one. It's cheaper for employees, with no back-end fees, and is less expensive for him to administer, which has allowed Borman to increase the employer-matching contribution from 10% to 50% (up to 2% of compensation). "I have my own money in the 401(k)," notes the 42-year-old, "so I want it to be a good one. And I want to be able to sleep well, knowing I did the right thing by my employees."

Whether your 401(k) sponsor is a leader or a loser, there's no stopping the revolution that's sweeping through retirement plans. Read on to learn how you can make the most of the changes.

BYE-BYE, BRAND NAMES

Until recently, the gold standard for a 401(k) was the ability to offer famous-name retail mutual funds such as Fidelity Magellan, Janus and the like. That's changing fast. As 401(k)s amass millions in assets, corporate treasury staff increasingly are taking over the management of these plans from human-resources departments. "Corporate treasurers are used to running low-cost defined-benefit pension plans," says Peter Starr, a consultant at Cerulli Associates. "And they are asking why 401(k)s are paying retail instead of wholesale prices." Moreover, the U.S. Labor Department has been pressuring employers to keep 401(k) fees as low as possible.

The result: Many larger plans are switching to institutional funds that once were available only to pension funds and other big investors. In many cases, these funds are run by the same people who manage your retail fund--like the generic version of a brand-name product. Institutional funds on average charge fees that are 30% to 50% less than those of their retail counterparts, since they don't have to pay mass-marketing costs. (It's also cheaper to serve a few larger accounts than numerous smaller ones.) Roughly 30% of all 401(k) assets are now stashed in institutional funds, compared with just 23% in 1996, according to Cerulli Associates. At the same time, retail funds have seen their share of 401(k) money slide to 33% from 35%. The shift is expected to continue. By 2001, Cerulli predicts, institutional funds will make up fully 39% of 401(k) assets, surpassing a projected 31% in retail funds. Among the major companies using non-brand-name funds are Xerox and Novartis, yet even a medium-size business like Vulcan Materials has begun using institutional funds, and many more are expected to follow. "What has been a trend among the largest 401(k) plans is moving down the ladder as account balances grow," says Douglas DuMond, a senior vice president at investment manager Nvest. "Today, many mid-size companies can qualify for institutional money management."

For 401(k) investors, institutional funds are a sure way to speed the growth of your retirement savings. That's because a less costly fund lets more of your money compound, and over time even small differences really add up. There are other advantages too. Performance is likely to be more consistent, since institutional funds are designed to adhere to one investing style. Institutional managers also tend to follow a buy-and-hold strategy (they don't have to cope with the volatile cash flows that run in and out of a retail fund), which can further boost returns.

Lower-cost funds are helping Maria Diaz reach her retirement goals. By regularly maxing out her 401(k) contributions, the 39-year-old insurance manager at Xerox has amassed some $250,000, stashed mainly in Xerox's core institutional stock fund options. "The lower expenses," she notes, "help the funds perform even better, which will help give me the nest egg that I need."

No one expects retail funds to vanish from 401(k)s anytime soon. Since most smaller companies still lack the assets to qualify for institutional accounts, a retail menu may be the best possible choice. Moreover, to ensure that employees have a broad range of options, many larger companies, such as Chevron and Delta Airlines, offer both retail and institutional funds. After all, performance details and portfolio information remain much more widely available for retail offerings than their clubbier institutional cousins. During a market rout, for instance, you may not be able to turn to the business pages or the major financial news websites to learn how your institutional fund is faring. But technology is changing that: 401(k) plan sponsors increasingly are providing employees information on their institutional funds via desktop computer.

What to do: You may not know whether you have institutional funds in your 401(k), since many plans still do not advertise that fact. Check with your benefits manager or plan provider. If your plan has them, you might consider using them for the bulk of your 401(k) money. But you'll want to remember this caveat: Although institutional funds are generally less expensive than the brand-name funds, there are exceptions. Index funds, even those of the retail variety, can be just as cheap, if not cheaper. And a few lower-cost families, such as Vanguard and TIAA-CREF, run actively managed retail funds with expense ratios that rival those of institutional funds. Be sure to compare the costs--and performance--of your plan's various offerings.

BREAKING UP THE FUND FAMILY

The typical 401(k) once offered only funds from a single family. But as plans have grown, most employees have a wider range of choices. Today, 70% of large and mid-size companies offer funds from two or more families, up from just 40% two years ago.

Spreading your money among funds from different companies can reduce your risk. That's because in some groups, such as Janus and Fidelity, the leading funds often hold many of the same stocks. Besides, no single family excels in all investing styles. Consultant Roxanne Fleszar of Financial Resources Management counsels employers: "Only by offering funds from different families can you get good performance across the board."

Of course, a menu of hundreds of funds can be confusing. So, many large companies are creating a multilevel, or tiered, 401(k) that steers employees toward investments based on how much complexity or risk they prefer. Eastman Kodak, for example, starts with life-cycle funds, which are all-in-one portfolios that often automatically change your mix of stocks and bonds as you age. The second tier consists of a group of core index holdings, followed by a third tier with 27 retail funds from several families. "Our plan allows any participant, regardless of his or her expertise, to design a portfolio that will provide for his or her retirement," says George Dascoulias, retirement plan manager at Eastman Kodak.

Another fast-growing option is the self-directed brokerage account--offered by about 10% of large company plans--which allows employees to invest in nearly any stock or mutual fund. Ted Benna, the pension consultant who designed the first 401(k) plan, predicts that wide-open choices will soon be the norm. "You can't tell employees they have to invest for their own retirement but only give them a handful of funds," Benna says, "especially when they can invest anywhere they want outside your plan."

What to do: Don't hog the smorgasbord. Your first job is to focus on your asset allocation, and until you have a sizable balance, keep your mix simple. "For investors with less than $50,000, you probably don't need need more than a stock index fund and maybe a bond fund," says Sue Stevens, financial planning specialist at Morningstar. As your balance grows, you can diversify, moving into such areas as international stocks and small-caps, but check the prospectus or fund description and the latest annual report to make sure your choices use different investing strategies, and don't load up on the same stocks.

CLICK HERE FOR ADVICE

You probably haven't received much guidance from your employer on how to invest your 401(k) money. But help is on the way. Nearly 30% of companies already offer some type of investment modeling software, which can assist you in measuring the riskiness and potential returns of your portfolio. Among them: Merck, 3Com, Fujitsu America and Dole Foods. David Wray, president of the Profit Sharing/401(k) Council of America, an industry trade group, predicts that all plans will offer personal financial advice through the Internet within five years. "Online advice is going to have a huge impact on how 401(k) participants invest," he says. "Most employees have no idea where to invest or how much they need to save in the first place."

An online leader is Fidelity, whose 401(k) administration business has signed up 135 companies for its Portfolio Planner service. But a pack of independent online advice providers are jostling in a crowded financial services field, including 401kforum, Financial Engines, S&P's Rational Investor and Morningstar's ClearFuture. Their services differ in style and approach, though they all do essentially the same thing: forecast your chances of meeting your retirement goals based on your current investing strategy, and recommend asset allocations and specific funds that will help you get there.

Online advice worked wonders for Randy Smith, 44, of Plano, Texas. The Southwest Airlines pilot used 401kforum's services to review his $500,000 account. "Two years ago, I had more than 70% of my money in small-cap growth funds because I figured I would get more return," Smith says. "But I learned that I was taking too much risk for the amount of reward I was getting." As a result, he shifted the bulk of his equities money into more stable large-cap stock funds. "As a pilot, I have to retire at age 60, so I'm counting on my 401(k) plan," says Smith, who is married with two children. "And with the online advice I'm getting, I have a lot more confidence about my strategy."

What to do: It may seem obvious, but don't just sit there if your plan sponsor provides online advice--the potential benefits are too great to ignore. And for those without employer-sponsored advice, you can access any of a number of websites that offer similar services for free or a modest cost, including Financialengines.com (which is offered on money's website, www.money.com), Morningstar.com and Directadvice.com. Bear in mind: Despite the sophisticated computer power of these programs, you're getting only a best guess. So consider the results a useful first opinion. If your financial situation is complex, or if you hope to retire in the next few years, you may want to talk one-on-one with a good financial planner who knows about potential tax consequences and estate-planning issues.

FIGHTING FOR A BETTER PLAN

Most employees now realize that the quality of their retirement depends on the quality of their 401(k) plan. No surprise, then, that they're quicker than ever to demand plan improvements--and if that doesn't bring results, to resort to legal action.

Consider Sue Franklin, a financial services representative in Danville, Va. As an employee of Signet Banking Corp., Franklin had access to top-performing investments, including Vanguard 500 Index. But in 1997, Signet was purchased by First Union, and her 401(k) money was shifted into First Union's own mutual funds, which were not very good performers but generated income for the parent company. "I was outraged," says Franklin. The 55-year-old figures her account balance, now about $140,000, would be worth $240,000 if she had been able to stick with her original funds. "I was planning to retire by now," she says, "but I can't."

She fought back and today leads the list of plaintiffs in two lawsuits filed last year against First Union. In the first suit, former employees of Signet Bank allege that First Union breached its fiduciary responsibilities by dumping their 401(k) money into poorer performing investments that the bank had a vested interest in. In the second suit, a group of First Union employees claims the banks' 401(k) plan has excessive expenses and not enough investment choices.

First Union denies any liability and vows to defend itself vigorously. "Our plan," says a bank spokeswoman, "provides participants with a broad range of investment options, which are prudently and appropriately selected. First Union administers all of its plans for the benefit of its employees."

The two lawsuits are being watched closely by a 401(k) industry seeking a clearer definition of employers' retirement plan obligations. "This case could have enormous ramifications," says William Arnone, director of employee financial education at Ernst & Young. Adds Michael S. Gordon, a pension attorney in Washington, D.C.: "Most plan sponsors have very little notion of what their fiduciary responsibilities are--they often think that simply providing a plan is all that's required." Until further light is provided, it's up to the employees to push for improvements.

What to do: Clearly, a lawsuit is a last resort. If you are unhappy with your plan, the best strategy is simply to let your employer know. Make phone calls, write letters, talk to your plan administrators. Ted Benna recommends enlisting co-workers, particularly the top executives, who probably have more dollars at stake in the plan than you do. You'll also want to consult these websites that publish tips on investing and upgrading a plan: 401kafe.com, which is part of 401kforum and includes advice by Benna; TimYounkin.com, run by a pharmacist who doubles as a 401(k) rabble-rouser; and Quicken.com/retirement/401k, which offers loads of calculators and tax info. (For more Web guidance, see the box on the facing page.)

Meantime, make sure you have your basics covered. As Woody Allen once said, 80% of success is just showing up; so start saving as soon as you become eligible for your 401(k) plan--with the growth of automatic enrollment, that often means as soon as you join the company. Invest enough to get a full matching contribution, if one is offered. Squirrel away the maximum allowed, which is $10,500 for the 2000 tax year, up from $10,000 in 1999. Monitor your account at least annually to ensure your asset allocation remains on target. And don't settle for clunkers just because that's what is offered: If your 401(k) has a disappointing international fund but a decent small-stock fund, then put more of your money into the small-capper and invest in international funds outside of your plan.

Most important, remember that even a limited 401(k) plan is better than none at all. You certainly don't have to wait for the 401(k) of tomorrow to start investing today.

REPORTER: JUDY FELDMAN