To pay for a comfortable retirement, more and more American workers will be relying on defined contribution plans such as 401(k)s and 403(b)s instead of the traditional defined-benefit pensions that their parents and grandparents had.

Defined-contribution plans give participants more control over their retirement savings. But they also give participants much more responsibility.

Workers who have the right tools and use them to build portfolios suitable for their own needs and risk tolerance – and who choose to make sufficient contributions – may benefit from these plans. But many workers don’t have the best tools. And many find they are faced with confusing choices that can easily lead to counterproductive decisions.

One of the worst moves many 401(k) investors make is investing too heavily in the stock of their own companies. Statistics suggest that 20 percent of 401(k) investors have more than half of their money in company stock and that 22 percent of all the money in 401(k) plans is in company stock. This indicates that many people are placing their financial futures at huge risk.

Some advisors say 401(k) investors should have no more than 10 percent of their money in company stock; even that may be too much. No matter how good you believe your company is, you should ask yourself: Are you comfortable with the potential permanent loss of a big chunk of your money? If your company gets in trouble, a total loss is a very real possibility. Many people who worked for Delta, United, WorldCom and of course Enron learned this lesson the hard way.

Investors make a lot of other mistakes with their 401(k) plans. That’s partly because of the poor quality of the investment vehicles in these plans and partly because of the poor or nonexistent advice provided to them.

Faced with all these obstacles, it’s understandable that many participants typically default to what they believe to be the safest investments. Unfortunately, that means that far too much money ends up in low-yielding money-market and stable-value funds. Such funds can make great sense for very conservative investors, but their low returns can prevent many households from reaching their retirement goals.

Most investors need at least some stock funds to provide the growth that can produce enough money to fund a comfortable retirement. You don’t need to invest all of your money in stock funds, of course. But the younger you are and the greater your risk tolerance, the larger that percentage can be. Most people should consider investing 20 to 80 percent of their retirement assets in well-diversified portfolios of stock funds.

By diversified, I am not talking about a fund with 20 stocks or even 500. To help reduce your overall volatility and expose you to the entire world economy, you should own funds that invest in large stocks and small stocks, domestic stocks and international stocks, value stocks and growth stocks. Index funds are the best vehicles for this, and fortunately many retirement plans offer index funds.

Fees and expenses can be a major drag on a retirement portfolio, eating up 2 percent to 3 percent of your assets every year. Operating expenses charged by mutual funds, usually expressed as a percent of assets charged annually, are relatively easy to research in a fund’s prospectus. The average mutual fund charges about 1.5 percent. Index funds typically charge 0.5 percent or less; using them effectively adds an extra percentage point of return to a portfolio – and that can mean hundreds of thousands of additional retirement dollars over a working lifetime.

Other fees are more difficult to discern and are often hidden from plan participants. Administrative fees often eat up another 0.5 percent of your assets annually. In some cases, part of this fee gets kicked back to employers, sometimes as a hidden incentive to get an employer to choose a particular plan. In some cases, when insurance products like annuities are used, other hidden expenses effectively pay lucrative commissions to the sales agents.

One of the simplest and safest ways to improve your investment returns is to ask your plan administrators about these charges. If they are high, seek co-workers who will join you in lobbying for less expensive options like index funds.

To learn more about how to make the most of a 401(k) or similar plan, visit www.401khelp.com

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