How to choose your 2009 employee benefits: Part 3

What are the signs of autumn? Falling leaves, frosty mornings, and Open Enrollment. In this multi-part series, we'll help you sift through the choices among your employee benefits.

Part 3: Retirement-plan contributions

In 2009 you can contribute as much as $16,500 to your 401(k) and 403(b) retirement plans, the IRS announced recently. That's an increase of $1,000 from 2008. If you're 50 or over, you can add $5,500 more, an increase of $500 over last year.

In this economic environment, it may be hard to consider maxing out on your retirement-plan contributions at work. But if you can at least try to put aside enough each pay period to qualify for your employer's match, you'll be doing yourself a favor twice over.

For one, that match is like an automatic pay raise. If your employer matches 50 cents on the dollar, setting aside, say, 6 percent on a salary of $60,000 earns you an extra 3 percent, or $1,800 a year.

Your savings on income tax also is significant, because the money you set aside for your retirement account is subtracted from your gross taxable income. A couple filing jointly with a household income of $70,000 who set aside 6 percent of income—$4,200—would save $1,050 in federal taxes for 2009.

Sinking money into the stock market may seem like a fool's errand these days. But findings from our own Consumer Reports Money Lab shows that dollar-cost averaging—the type of regular, incremental investing that happens with 401(k) and 403(b) contributions—is most beneficial to investors particularly when markets are declining. Apportioning your money well among different investments—U.S equity mutual funds, U.S. bond funds, international funds, and other options—can make all the difference in your long-term returns. Of course, how you make those allocations depends on how long you have until retirement, and how much risk you feel you can take with your money.

If you don't feel comfortable making investment choices and allocations, or aren't the type to regularly monitor and rebalance your investments, consider a target retirement fund. Such funds have been been gaining popularity in retirement plans and are often the default investment options for new employees. Target-retirement funds typically include several index mutual funds allocated according to a projected retirement date. They're automatically rebalanced, and as you get closer to retirement, the allocation gradually shifts toward less risky investments. What is more, because they're made up of low-cost index funds, you'll pay less in commissions and fees that can drag down your returns. Click here for our Consumer Reports Money Adviser analysis of what makes these funds alike and different.

Click here for additional advice from Consumer Reports Money Adviser on getting the most from your employee benefits. And click here for our tips on cultivating your 401(k) for the best returns.  —Tobie Stanger

Comments

[Chris Smude]

A couple points worth adding:
1.) While some folks may get a tax deduction/break today by contributing to a retirement plan, they may end up paying more in taxes down the road when they pull the money out. Careful consideration of the tax implications should be taken today as well as into the future. It's not an automatic positive for everyone.

2.) Be careful of the extra fees often associated with "target funds" - there is often an added layer of fees associated with managing your dollars this way (in addition to the funds' management fees, transaction fees, expenses, etc.).