Make saving a no-brainer with retirement plans that automatically adjust for age and income, Dean Kohmann advises.
Eric Wagner Make saving a no-brainer with retirement plans that automatically adjust for age and income, Dean Kohmann advises.

Many architects don't know how they'll pay this month's bills, much less save money for retirement. But employers can help by offering retirement plans that take some of the sting out of putting money away. Unfortunately, the workings of the typical retirement plan—a 401(k)—are highly complex, and the Simple plan (a 401(k) cousin, useful for firms of up to around 25 people) isn't particularly simple. It's tempting to forgo the company plan and consider designing your own investment strategy. Fortunately, there are experts like Dean Kohmann, a Charles Schwab corporate and retirement services vice president, to help. Says Kohmann, “Every investor should have a plan, just like every architect should have a blueprint.”

Define your contribution. Once upon a time, your employer might have offered a defined benefit plan, which meant that if you stayed with the company for a certain number of years, you'd receive a fixed amount each month when you retired. That kind of pension has gone the way of dial telephones. “Many defined benefit plans are being terminated, or they're being frozen, so the people in them today will continue to earn benefits, but new employees are not covered,” says Kohmann. The replacement, in many cases, is a defined contribution plan, in which the employee agrees to contribute specific amounts—which the employer may decide to match. Then, of course, someone has to decide how the funds should be invested. In the past, if the employer invested the employee's contribution and the investment tanked, the employee might have had grounds for a lawsuit.

Enter Congress. The Pension Protection Act of 2006 was designed to pave the way for employers to be more proactive in creating retirement plans and investing the funds. Now, the employer can automatically enroll new employees and put money into a variety of investments, without as much possibility of being liable for a downturn, Kohmann says. Under the new law, a favorite investment vehicle is the target-date retirement fund, also called a life-cycle fund, which is designed to maximize the payout on your projected retirement date. The fund automatically becomes more conservative as your retirement nears, to reduce risk.

You have to be in to win. Even with automatic enrollment, employees are allowed to opt out of company plans. But there is no good reason to opt out, since investments in a 401(k) or Simple earn interest and dividends tax-free. It's true that the tax advantage is merely a deferral—you have to pay taxes when you make withdrawals from your account, beginning no later than age 70½. But you will probably be in a lower tax bracket then.

Up the ante. Employers may want to include a provision that automatically increases each employee's contribution once a year, or whenever the employee gets a raise. Such provisions are helpful, Kohmann says, because when it comes to putting money away, “inertia is very powerful.” When Schwab sends representatives to speak with employees about their retirement planning, “they typically double their contributions,” says Kohmann, “which is pretty amazing, given how hard it is to change people's behavior.”

If you're an employee ... You'll probably do better with a managed fund, particularly a life-cycle fund, than if you choose your own investments, Kohmann says. But if you feel you must make your own investment choices, diversify.

If you're an employer ... To recruit and retain good people, create a retirement plan for them. To recruit and retain great people, match their contributions.