401(k)s: They Are A-Changin'

My husband's company recently made some changes to its retirement savings plan. The bad news came in a letter informing us that the solid 401(k) investment options he'd had for years would be replaced with higher-fee choices that don't perform as well. The option for an international fund had been eliminated altogether.

Employees who failed to reallocate their current balances or new contributions, the letter continued, would see their funds moved into a target date fund, which usually means more fees over the long haul.

We were not happy. But we had to be realistic.

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In these ever-changing economic times, many companies are revamping their retirement savings programs (if they have them at all), and employees need to revise their financial plans to protect their nest eggs.

What's the best way to do it?

Change may be unavoidable, but you don't have to take it lying down. Here's how to make the best of the situation.

Even if you don't like the new investment options offered by your employer, you still should keep contributing to your company's 401(k) plan.

Bottom line: There are few investment options that allow you to save as much money in one year -- especially if your company matches some or all of your contributions.

In 2011, for example, you can sock away $16,500 in your 401(k) account, and if you're over age 50, you can save an additional "catch up" contribution of $5,500. Each dollar you save will lower your taxable income for the year, and the money will grow tax-deferred until age 59 1/2, which is the first time you can withdraw funds penalty-free.

If your employer offers matching funds, that's free money you can't pass up. Even if you think those dollars could do better in other investments, the only way to add to your 401(k) nest egg is to continue your contributions to the current plan.

And when you eventually leave your job, you can roll your 401(k) into an Individual Retirement Account, or IRA, and then you will have an unlimited world of investment options from which to choose.

Your 401(k) is an important part of your retirement plan, but it's not the only part.

If you've had other jobs in your working career -- and most people have -- you probably have some old 401(k) plans or IRAs set aside for retirement. You need to consider all of those funds when you evaluate your overall asset allocation and how the workplace changes to your current 401(k) fit in.

To make the math simple, let's say your retirement savings totals $100,000. You've had several jobs over your career -- including the one you have now -- so you have three different 401(k) plans. Imagine you've also invested in an IRA. Each of those accounts makes up 25 percent of your net worth.

Separate from your retirement plans, you've considered your risk tolerance, your time horizon and your investment options, and you've decided on a very balanced approach. When you add your retirement assets together, you should have 25 percent in large-cap growth, 25 percent in small-cap growth, 25 percent in international and 25 percent in bonds.

Then let's say you received a letter from your current 401(k) plan that eliminates your international option. The solution is relatively simple: Reallocate your money in another one of your accounts to make up for the lost investment choice in your current 401(k). For example, if 401(k) No. 1 is 25 percent in international, increase that to 50 percent and eliminate the large-cap fund in that account. Then, in your current 401(k), increase your large-cap stake to 50 percent to make up the difference.

Presto -- your allocation is the same as it was before the change to your current 401(k) options.

Also note that if your 401(k)s from former employers have sub-par investment choices, you can roll those funds into IRAs, which will open your options to the universe of mutual funds, rather than be limited to the funds offered by that plan.

And it's worth saying again: Your current 401(k) isn't forever. When you retire or otherwise leave your job, you can roll your 401(k) to an IRA and reallocate again, if needed.

A note on target date funds: These are invested with the goal of a certain end date, such as retirement in 2020. The fund's allocation gets more conservative as the date nears, which makes the investment sound like a no-brainer. For some, it is, but not for everyone. I'm more of a hands-on kind of girl.

If you don't think your current 401(k) plan is as good as it could be, do some research and then speak up.

Start by checking up on your company's 401(k) with Brightscope, an independent firm that rates 401(k) plans. Simply enter your company name on the website and you'll see how your company's plan compares to other companies.

For example, my husband's company has a 401(k) plan rated at 68 -- on the higher end of the "average" rating. Not so bad. But the site says this rating could translate into "11 additional years of work or up to $103,400 in lost retirement savings. And that's before this most recent change in investment options.

Then, get a copy of your plan's annual report, which will detail costs paid by employees and by the employer.

Next, check in with Morningstar.com to review the funds offered in your plan. You can compare, for example, your available funds with their peers in regards to fees charged, historical performance and more.

If your plan's funds are below average, you have some powerful ammunition to take to your employer.

If you're a number-cruncher like me, you might want to create a simple chart for your employer. Compare the expenses and performance of the funds available in your plan to the average for that asset class. Make sure you offer accurate information by comparing international funds to international funds, bond funds to bond funds and so on.

Share your research with the person at work who manages your company's 401(k) offerings, along with a brief letter explaining other 401(k) options. Lay out your evidence and make your case.

Don't assume the person receiving your information is an investment guru. Perhaps he or she was influenced by a rep from the company that manages the 401(k), so you could gently offer an education that this person has never had before.

Also keep in mind that your employer could be selecting specific investments because it's a lower plan management cost to the company or based on other cost savings. In that case, it may be an uphill battle.

But you've got nothing to lose by doing your homework. At worst, your employer makes no changes. At best, you get a better plan.

Check out these sample letters to employers from The Motley Fool for some ideas.

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