Conundrum: how to get procrastinators to save

Who'd pass up "free" money? More people than you might think. Nearly a third of American workers fail to take advantage of 401(k) plans.

Never mind that employers typically match a worker's contributions with hundreds or thousands of dollars a year. Never mind that employees don't have to do anything to qualify other than stash money away for retirement. For a variety of reasons, including inertia and ignorance, many workers don't take the perk.

Even of those who do sign up, about 1 in 5 doesn't contribute enough to meet their companies' full match, according to a new survey by the Hewitt Associates human resources firm.

Considering the stark economics of corporations, it may make little sense for employers to spend too much time or effort worrying about workers who turn up their noses at benefits. But with an eye toward improving morale, an increasing number of employers are automatically enrolling workers in 401(k)s and trying to prevent "investment paralysis" by simplifying the often-bewildering array of fund options.

"It's definitely a different world than 10 years ago, when we thought it was simple: Give [workers] a tax benefit, give them a match, and hold a seminar. That's all you need to do to get high savings rates," says Stephen Utkus, principal at the Vanguard Group's Center for Retirement Research in Malvern, Pa. "What we've come to recognize is that gets you only so far, with about two-thirds of the population. Many people are reluctant savers or reluctant investors."

Young people are especially stubborn, with just 46 percent of workers under 30 contributing to 401(k)s, according to the Hewitt Associates survey, which examined the investing habits of more than 2.5 million Americans who have the investment option at work. The rest miss the opportunity to save money, tax-free, until the IRS comes calling during retirement.

"Procrastination is what we're seeing in people who are waiting," says Lori Lucas, director of participant research for Hewitt Associates. "We see consistently that people do recognize the importance of saving for retirement, but they thought they couldn't afford it, or they were worried about the market, or they thought they had time to get to it later."

American companies often match half of what an employee contributes - up to 6 percent of his or her salary. A worker making $50,000 a year, for example, could divert $3,000 into a 401(k) and add an extra $1,500 to it, courtesy of the company. Frequently, however, "workers don't see it in the same way as their employer offering them the same amount as a 3 percent raise," says Amy Reynolds, a consultant with Mercer Human Resource Consulting.

Unfortunately for the I'll-get-to-it-later crowd, matching employer contributions are a use-it-or-lose-it proposition. Workers can't create a 401(k) account today and ask their boss to make retroactive contributions for, say, 1998.

None of this is a secret, of course, and while 401(k)s are taking an ever-larger role in employee retirement plans, they're hardly new. Companies began offering them in the early 1980s, allowing employees to enter the plans if they dropped by the personnel office and signed the appropriate forms. That approach worked fairly well, but the most challenging part - making the trip to the human resources department - left plenty of employees to their own devices.

Enter automatic enrollment. Under this "auto pilot" approach, employees are automatically placed in 401(k) plans unless they say otherwise. Automatic enrollment was once a legally dicey proposition, but new regulations in the late 1990s gave companies more leeway. Deloitte Consulting reported last year that 15 percent of companies surveyed offered automatic enrollment, and another 13 percent were considering it.

Now, several bills in Congress would make the law even more friendly to auto-pilot 401(k)s, according to a report by the Association of Senior Human Resources Executives.

But automatic enrollment raises new questions. If the company handles setting up the 401(k) for you, where should it put your money? In its own stock, a favorite 401(k) investment option? In mutual funds? Or in the traditional default - safe and boring money-market funds?

Companies can get themselves into a legal pickle if they offer risky default investments, says Terrance Odean, professor of finance at the University of California at Berkeley. But politicians could change that. "The government could say these are the approved default options, and companies cannot be sued for having encouraged their employees to take undue risk," he says.

Default or no default, 401(k) investment options - sometimes running into the dozens - can overwhelm workers, especially those without any financial education. New "Roth" 401(k)s, which debut next year, will make things even more complicated by offering workers a new alternative - a way to avoid a big tax hit at retirement.

To make investing less vexing, fund companies offer plenty of "lifestyle" funds, which automatically adjust themselves as workers grow older. Some companies also offer "managed" 401(k) accounts, which are designed for individual investors by an outside financial manager.

Mr. Utkus of Vanguard, which offers managed accounts, says they're best for older workers who have significant 401(k) accounts but are mystified by the wide world of investment options. "The whole idea," he says, "is taking money management out of your hands."

About a third of workers don't contribute to 401(k) plans. For those who want to change their ways, Scott Revare, founder of Smart401k.com, suggests taking these steps:

• Max out your employer match. The average match is 50 cents for every dollar an employee contributes, up to 6 percent of your salary. For an employee making $50,000 a year, that's $1,500 in "free money toward your retirement," says Mr. Revare.

• If you can't afford to contribute, set up an automatic savings increase plan that adds 1 percent of your salary to your 401(k) each year until reaching the max.

• Reevaluate your 401(k) holdings two to four times a year, or every time a major life event occurs, such as the birth of a child, a child entering college, or a career change.

• Minimize allocations in company stock. One-third of all companies use their own stock as part of the matching contribution feature, according to a recent Hewitt Associates study. "Keep no more than 5 percent in your company stock - since 100 percent of your earnings are tied to the company's welfare already," says Revare.