The care and feeding of your 401(k) account.

• Author: Lizzio, Joseph P.

Retirement planning used to be relatively easy. All you had to do was work with a good company for a large part of your career, then collect your pension checks in retirement. In recent years, the traditional employer-provided pension plan has undergone a transformation. Previously, most pension plan investments were directed by the employer or a trustee. Today, many employers have adopted or are in the process of adopting 401(k)s or a similar type of retirement plan. These give more of the retirement planning responsibility back to the employee. If you participate in such a plan, generally you must decide how your 401 (k) assets will be diversified and invested.

Basically, a 401(k) plan allows you, the employee, to defer a percentage of your income--typically one percent to 15%--up to a maximum amount of $9,500. Many companies match deferrals in some way, and your contributions and those of your employer are placed in a special retirement account for your benefit. You choose how you want your retirement account money invested.

Usually, you will have the option to make choices from among a number of investments that range from conservative to aggressive. Some financial advisors believe that a conservative approach may not provide sufficient funds for retirement over the long term. That's why many professionals recommend a growth or a moderate growth approach to investing when you are young, with a gradual shift to a more conservative outlook as you move closer to retirement age. Of course, your investment strategy depends not only on the number of years to retirement, but individual goals and risk tolerance as well.

As a hypothetical comparison between a growth investment approach and a conservative one, say you earn $50,000 a year and wish to retire in 15 years. Assuming you defer 10% of your income ($5,000) into a 401(k) plan each year and your employer matches 50 cents on every dollar you defer ($2,500), you will accumulate $7,500 annually in the plan. Should you choose more conservative investments with a return of six percent annually, your 401(k) account would amount to $185,044 in 15 years. If inflation averages four percent a year, your money will grow just slightly faster than inflation.

If, however, you selected more growth-oriented investments and were able to earn a 10% annual return, your 401(k) assets would come to $262,123 in the same period. This represents more than a $77,000 difference between the conservative and the...