Your employer may offer the 401(k) plan as a retirement savings vehicle. The plan is set up through an insurance or mutual fund company. The investment options available range from conservative to aggressive strategies. As the employee, you are responsible for selecting the amount of money you want to contribute as well as the funds to invest in. Your contribution into the 401(k) plan reduces your taxable income dollar for dollar. It’s possible that your employer will make matching contributions, which increases your rate of return. Because it is a retirement plan, it is a tax shelter and there is no tax on the investment income earned.

Although the 401(k) plan is an effective retirement savings vehicle, there is a lot of responsibility placed on you as the employee. There may be uncertainty about:

• how much of a contribution is sufficient
• which funds to choose
• how many to choose
• how often the portfolio should be evaluated
• if the money can be borrowed or used as collateral

As overwhelming as it may seem, all the bases can be covered with five simple rules.

1. If possible, consistently contribute the maximum allowed into your 401(k) plan. The more you save, the more money you will have, regardless of the performance of your portfolio. Research has indicated that a 7 percent salary contribution into mediocre funds generated more money in the long run than a 2 percent salary contribution into top-performing funds.

   For 2008, the maximum 401(k) contribution allowed is $15,500. If you are over 50 years of age, you are allowed a catch-up contribution of an additional $5,000. If you cannot afford to contribute the maximum, sock away at least:

   • 10 percent of your salary in your 20s
   • 12 percent in your 30s
   • 14 percent in your 40s, increasing your contribution by at least 1 percent a year, until you’ve reached the maximum contribution allowed
2. Invest no more than 10 percent of your money in company stock. It’s too risky. If the company you work for does not do as well as anticipated, not only could you lose your job but your retirement plan will suffer as well.
3. Diversify your investment choices. Choose an age-appropriate mix of funds that will be aggressive enough to get the returns you need, but not so risky that you become panicked and stressed during market downturns. Your asset mix should change with your age. Start out aggressive in your younger years, and become more conservative and income producing the closer you get to your retirement date. Here are two asset allocators that are easy to use:
   • Asset Allocator on Bloomberg.com
   • Asset Allocator on MSN.com
4. Evaluate the portfolio once a year. Assess the account’s performance and asset mix. Compare the current asset allocation to the target asset allocation you calculated in Step 3. Gains and losses in your fund selection will put the allocation off target. If your targets are off by 10 percent or more, you should consider realigning your allocation. Transfer enough money out of your high-performing investments into your lower-performing investments. This will bring your asset allocation back on target. You are also investing wisely by selling high and buying low when you transfer the money from higher-performing to lower-performing investments.

   If you don’t want to concern yourself with asset allocations and annual rebalancing, consider investing in Target Date Retirement Funds. These mutual funds automatically adjust your portfolio allocation as you get closer to your target or retirement date.

5. Leave the money alone. Even though the law allows you to borrow 50 percent of your account balance to a maximum of $50,000, leave that money to continue to grow income tax free. Find another source for the loan. Sure you can borrow the money and avoid penalties if paid back according to IRS rules, but remember, there are no loans available for retirement expenses.

   When you change jobs, you can roll the money into the 401(k) of your new company or into an IRA. If you like the 401(k) plan at your old company and have a balance of at least $5,000, you can keep your money there by notifying the human resources department. Be aware that if you decide to cash out instead, you will lose a substantial chunk of change because of the 10 percent early withdrawal penalty and federal and state income taxes.