Ok, I have to admit that this headline caught my attention “Help! I have no ideas where my 401(k) is, or what to do with it.” The article goes on to describe an individual who has had several jobs and lost track of her 401(k)s along the way. I like the plain English language the writer uses to describe the elements of a 401(k).

Here are a few highlights:

• Regrets from the innovator who created the 401(k):

The man responsible is Ted Benna, and he’s currently in his 70s and semi-retired on a horse farm in Pennsylvania. In 1978, he realized that a newly passed tax code — yes, section 401(k) — left a loophole for retirement savings that we’ve been exploiting ever since. Then, in 2011, he startedtelling reporters that he’d accidentally created “a monster”: a giant finance vehicle fueled by hidden fees that Americans are blithely packing their hard-earned money into, unaware that their savings are just spinning wheels in the mud. It’s all become too complicated and confusing, Benna said. People can’t understand their own retirement plans anymore.

• Taxes and 401(k)s:

The function of retirement plans is to dodge taxes in a way that makes you more money over time. Which taxes you dodge depends on the individual plans. For example, whatever you put into your 401(k) is “pre-tax” — i.e., the IRS hasn’t touched it yet. That means it has more oomph in the market, where more money has a snowball effect. Also, unlike a normal investment account, you don’t have to pay taxes on your 401(k)’s growth every year. Of course, you will get taxed on those dollars at some point — namely, when you take them out of your 401(k) after you retire.

• Investing advice simplified:

Christine Benz, the director of personal finance at Morningstar, essentially studies this stuff for a living and makes investing very simple: “Either a pure index fund or a target date fund is a fine idea; you can’t go wrong with those,” she says. The beauty of both of these options is that they’re low-fee and low-maintenance — and you can pick them out on a confusing drop-down menu of investment, which is saying a lot.

• So, what’s a target date fund?

A target date fund is particularly great for people who want to stay hands-off, because the account is managed based on your age and life stage, so the balance of investments shifts automatically as you get older. (When you get closer to retirement, your investments should be very low-risk, but when you’re younger, you can afford to try riskier stocks that’ll hopefully get bigger results — to return to the gym metaphor, you can try trapeze gymnastics when you’re 29, but at 58 you’re be better off with Pilates.) As Christine put it, “A target date fund is the ultimate in do-it-for-me investing. Once you’re participating, inertia is your friend.” Music to my ears.

________

Since most young people’s first experience with investing will come through a 401(k) plan, we created a case study, Compound My Interest in 401(k) Plans, to give them practice in making these important life decisions.

About the Author

Tim Ranzetta

Tim's saving habits started at seven when a neighbor with a broken hip gave him a dog walking job. Her recovery, which took almost a year, resulted in Tim getting to know the bank tellers quite well (and accumulating a savings account balance of over $300!). His recent entrepreneurial adventures have included driving a shredding truck, analyzing executive compensation packages for Fortune 500 companies and helping families make better college financing decisions. After volunteering in 2010 to create and teach a personal finance program at Eastside College Prep in East Palo Alto, Tim saw firsthand the impact of an engaging and activity-based curriculum, which inspired him to start a new non-profit, Next Gen Personal Finance.