Morningstar has a terrific article (available to free members) titled Three Tips to Make Your 401(k) Work for You and I love it! Here’s a brief sample of why:

It’s surprising there aren’t many calls in the press to ditch the automobile. After all, think of all the dumb things people do with them. They drive much too quickly and sometimes after drinking lots of alcohol. They even drive while sending text messages, putting on makeup, and reading the newspaper. The consequences can be dire: More than 40,000 Americans die in auto-related deaths each year, with nearly 3 million suffering injuries of some kind.

Few things in the financial media annoy me more than the recent calls to 86 the 401(k) plan. And the above paragraph illustrates the absurdity of the move to end 401(k) plans quite nicely.

The article goes into greater detail about the push to eliminate the plan, but it also offers some real actions that investors can take to help get their 401(k) balances back on track, or to keep them on track so that they will function as intended – as a means to save for retirement, not get rich in the stock market (as too many seem to think).

Tip #1. Save More.

Yeah, I know, this sounds trite but it’s important not to simply gloss over it. My 401(k) balance dropped by about 30-35% from its 2008 high by the time the market bottomed in March of 2009 – and this was also at a time when my company canceled 401(k) matches! Things looked not so good, to say the least. But I didn’t get discouraged and start blaming the system. Partly because I have over 20 years left until I need that money, and partly because I know the stock market ebbs and flows. True, the market doesn’t usually drop by as much as it did by early 2009, but that also meant that there was near unprecedented opportunity for big returns in the coming months.

So, I looked at what I could do to change my situation and decided to increase my contributions. I knew that this would maximize my ability to buy more stock at those low levels, and also help offset my employers decision to break their promised benefit to me (i.e. contribution match).

I saved more. And the result was that my balance was over its pre-crash value in September, 2009.

Tip #2. Invest Wisely.

Most 401(k) plans are quite limited in the options open to investors, but that doesn’t keep them from screwing it up! For example, some employees “play it safe” and put all of their money in the money market equivalent. That’s stupid, unless you’re looking at retiring in the next 2 year, but even then you shouldn’t have all of your money in cash equivalents because you’re not going to suddenly withdraw all of your saving upon retirement. You need to keep some of it in stocks for long term growth so you don’t run pout of money in retirement.

So, basically, examine the options open to you in your plan, and diversify properly according your time away from retirement and other factors such as other assets available upon retirement – ex: home equity, pension plan, etc..

Tip #3. Be Flexible.

The best laid plans can often fall short due to factors beyond your control, so while it’s important to have a plan and stick to it, it’s also important to remain flexible and be ready to adapt to new realities as the economy (both U.S. and global) enter uncharted territory. This may mean working longer than you originally thought, or working part time jobs in retirement. Regardless, don’t get caught up in the way you think things ought to be and lose sight of the way things are.

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