Suze Orman Money Matters

A handful of new studies show some encouraging signs about how Americans are investing for retirement. But there's also plenty in the data that worries me.

Company Stock Still Too Popular

A joint report conducted by the Employee Benefit Research Institute (EBRI) and the Investment Company Institute (ICI) was quick to highlight that 401(k) participants continue to decrease their exposure to company stock. The survey shows the average is now 11 percent, down from 19 percent in 1996.

The reality isn't quite so rosy, however. The 11 percent is the average for all plans -- both those that offer company stock and those that don't. When you dive deep into the survey, it turns out that the actual percentage among only those plans that offer company stock ranges between 18 percent and 21 percent on average.

In other words, five years after Enron employees saw their retirement accounts vaporize, many people still have about one-fifth of their retirement riding on one stock. That's dangerously under-diversified. This is one case where smart investors know it's better to be below the average.

Auto-Enrollment a Mixed Bag

The growing popularity of 401(k) and 403(b) plans in which employees are automatically enrolled rather being asked if they want to enroll is a positive development. It's helped boost participation rates, and according to the EBRI and Mercer consulting, 66 percent of surveyed plan sponsors have adopted auto-enrollment.

So what's not to love? Well, once a company enrolls participants in a plan it typically sets a very low contribution rate -- say, 1 or 2 percent of their salary. Yes, that's better than nothing, but it's not going to get the job done. A low contribution rate can mean employees aren't even investing enough to qualify for the maximum company matching contribution, and according to the same survey less than 20 percent of plan sponsors automatically increase the contribution rate on a periodic basis.

My problem isn't so much with the employers who worry about being prudent. The problem is (still) employee inertia: It's not good enough to just assume that whatever your employer sets up for you is all you need. At the very least, you need to check and see if that automatic deferral rate is high enough to ensure you'll get the maximum company match. If not, increase your contribution rate right away.

Lifestyle Funds Can Be Too Conservative

Lifestyle/lifecycle funds continue to be quite popular within retirement plans. According to an ICI study, assets in these funds grew 57 percent in 2006 to $303 billion, after rising 57 percent in 2005.

Again, there's nothing inherently wrong with this development; it shows that plan sponsors are responding to the fact that employees found all the choices in their 401(k) plans too confusing. By offering a lifestyle/lifecycle fund in the plan, employees can solve their "problem" with a single quick fund choice that promises to correctly allocate their money among various asset classes tied to their age/investment time horizon.

My concern is that with just a little more effort, most participants can easily build a better portfolio for themselves within the choices offered by their 401(k) plan. What I don't like about the lifestyle/lifecycle funds is that even those designed for investors in their 20s and 30s tend to own a small portion of bonds. I don't think that's necessary when you have 30 or more years until retirement.

According to one survey, twenty-something 401(k) investors have nearly 20 percent of their money invested in bonds or cash. That's way too conservative. The only way to have a shot at earning inflation-beating returns over the long term (and when you're young you should be solely concerned with the very long term) is to focus on stocks, not bonds. Is it more risky? Of course. But the whole point is that you have time to ride out the rough times.

A better 401(k) solution that still keeps it simple is to aim for 80 percent in a large cap U.S. fund and 20 percent in an international fund. If your plan offers index funds for both, great; the lower you keep your costs, the more money you -- and not the fund operators -- will earn.

Active Managing Swamps Indexing

According to an ICI study of retirement accounts, including both defined contribution plans -- 401(k)s and the like -- and IRAs, just 10 percent of total invested assets are in index funds. This is the case despite the fact that across any meaningful time period, actively managed funds have a hard time beating indexes. Less than one-third of actively managed large caps bested the S&P 500 index over the past five years.

It's one thing if you don't have index choices within your 401(k) plan. But anyone investing in an IRA or a taxable account over which they have total control of their investment choices should be emphasizing low-cost index funds or ETFs. The cost advantage can add tens of thousands of dollars to your retirement nest egg by the time you're ready to start making withdrawals.

More Expensive Than You Think

Perhaps the most important recent retirement data came out of the Fidelity Research Institute's 2007 Retirement Index survey of nearly 800 retirees age 55 or older. It turns out that two-thirds of retirees said their expenses either went up or stayed the same in retirement. Respondents who reported an increase in expenses said their costs rose a whopping 39 percent on average. And don't assume they were expecting that price shock -- nearly half of the respondents were expecting their expenses to decline in retirement.

In the same survey, more than half (55 percent) of retirees reported that they stopped working earlier than they'd planned. About a quarter of those who were pushed into early retirement stopped working because of poor health or disability.

So not only is retirement turning out to be a lot more expensive than anticipated, the majority of retirees ended up in retirement earlier than they expected. This meant their earning days stopped before they wanted, and left them with less money saved up. Now they have to stretch what they have a lot further given the higher cost of retirement.

Get Serious Now

I hope that's a wake-up call for anyone who continues to put off saving for retirement. If there's one crucial takeaway from the Fidelity Research Institute's survey, it's that assuming you can wait until your late 40s or early 50s to get serious about saving for retirement is foolish.

The odds are that you might not have as long to work as you assume. At the same time, chances are that what you think you need to save is going to fall woefully short of what you actually need.

Clearly, it's time to stop the procrastinating and get planning. Your retirement depends on it.