How to make the most of your 401(k) plan

401(k) plans are the most popular type of retirement savings account for American workers. But they require workers to make important decisions that can have a major impact on how much they’ll ultimately have saved by retirement.

Here are some findings from the Plan Sponsor Council of America’s most recent annual 401(k) study, and what you need to do to increase the odds of having enough money saved by the time you retire.

Participation
Only 72 percent of workers enroll in their employer’s 401(k) plan. If your company offers one, you need to know when it allows you to participate: Join as soon as you’re eligible. Also find out how much you need to contribute to receive the maximum matching contribution from your employer.

The average employer contribution is about 4.6 percent of pay, up from 2.9 percent in 2007. Just more than 40 percent of plans make contributions in the form of a matching formula. The most common matching rate is 50 cents on the dollar up to a stated percentage of pay, typically 6 percent.

Each pay period that you aren’t contributing is a pay period you’re missing out on free money from your employer to be deposited into your account.

Contributions
Workers joining an employer’s 401(k) plan, either voluntarily or through automatic enrollment, can contribute to their account. According to the PSCA study, nearly 85 percent of participants contribute, up from about 77 percent in 2010. The average participant contribution rate is 6.8 percent, which is also up, but only slightly, from 6.2 percent over the same period.

But saving at a rate of 6 percent or 7 percent simply isn’t enough. According to the National Savings Rate Guidelines for Individuals, most workers who expect to collect Social Security benefits will also need to save at least 10 percent of their pay throughout their entire working lifetime to attain a reasonable chance of having enough savings to fund their retirement living expenses.

Almost 60 percent of 401(k) plans automatically enroll new employees into the plan. But when you’re automatically enrolled, you need to also increase your contributions to an amount at least enough to get your employer’s full matching contribution. After that, hike your contribution rate each time you get a raise, and do so until you’re contributing at least 10 percent.

Loans and withdrawals
About half of 401(k) plans allow participants to borrow against their account, and about 25 percent of participants have an outstanding loan. Those who do borrow from their account see it as a good way to get to their money in a hurry.

But 401(k) loans have a dark side: They’re habit forming and can make you poorer. When offered two loans, nearly 15 percent of participants take advantage of that. When offered three or more loans, about 12 percent of participants take them.

But workers who take loans from their 401(k) save less (6.7 percent) than participants with no loans (8.3 percent). Workers who don’t take loans are projected to save up to $749,000 by retirement age, whereas those with loans are on track to save about $100,000 less.

Loans are also a disaster for those who suddenly lose their job. If you can’t pay off the loan immediately, the unpaid balance will be included in income as a taxable distribution, which can wipe out your retirement savings in the plan.

Account balances
The PSCA study found the average account balance in a 401(k) plan, including those with profit sharing, is $131,355. The good news is that’s higher than a few years ago. In 2013 this was $116,333. According to the most recent figures from Fidelity Investments, the average plan balance is about $104,000, which is also up about 6 percent from a year ago.

For workers age 65 and over, these balances should be higher, and they are. According to Vanguard, this group’s average account balance is $209,984. But a closer look shows a dimmer picture: The median balance for those 65 and older is just $64,811, which isn’t enough for many workers to retire on.

Fidelity Investments says your retirement savings should total at least 10 times your final average pay by age 67 — which is attainable, if you enroll as early as possible, contribute enough and stay on track.