However, retirement plans have changed dramatically. As of 2004, 63% of workers with a pension plan have only a 401(k) plan, 20% have only a defined-benefit plan, and 17% have both (Source: Center for Retirement Research, March 2006). In 25 years, 401(k) plans have gone from a supplement to other pension plans to the main retirement plan for most workers. Yet, participants still make most of the choices in 401(k) plans, often making mistakes with those choices:

• Not participating. Approximately 21% of workers eligible to participate in a 401(k) plan do not do so. Younger workers are more likely than older workers not to participate.

• Not making adequate contributions. Only 11% of 401(k) participants contribute the legal maximum to their 401(k) plans. However, those with higher incomes are more likely to contribute the maximum. For instance, less than 1% of those with incomes between $40,000 and $60,000 contribute the maximum, while 58% of those with incomes in excess of $100,000 contribute the maximum.

• Not diversifying investments. In 2004, 32% of participants had no equity in their 401(k) plans, while 21% had 80% or more in equities. Approximately 47% had a diversified portfolio.

• Overinvesting in company stock. Approximately 15% of 401(k) plan assets were invested in company stock in 2004. However, most 401(k) plans do not offer company stock as an investment option. Plans with 5,000 or more participants typically offer this option, with 34% of total assets in those plans invested in company stock.

• Not letting balances grow. Approximately 45% of participants changing jobs cashed out their 401(k) balance rather than rolling it over into an IRA or another employer’s 401(k) plan. Most of the participants who cashed out were younger employees with relatively small account balances, who did not realize that allowing these sums to grow could result in a significantly larger balance at retirement age.

These mistakes significantly affect the amount that workers accumulate in their 401(k) plans. For instance, a typical worker who reaches retirement age with $58,000 of annual wages and has contributed 6% to the 401(k) plan with a 3% employer match should have an accumulated balance of $380,000. However, in 2004, the median balance for workers between the ages of 55 and 64 was only $60,000 (Source: Center for Retirement Research, March 2006).