The Act 2 Column: Make the most of (401) k

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When AOL CEO Tim Armstrong made a splash recently about changing (and then not changing) the 401(k) corporate matching policy, the focus was on his rationale for the new policy. He blamed costly "distressed births" of two AOL employees ($1,000,000 each) and an additional $7.5 million attributable to Obamacare, as the catalysts for the shift in the company's contribution to a one-time end-of-year match from a per-pay period match.

Now that Armstrong has apologized and restored the policy, it's a good time to review a few 401(k) basics. As Ron Lieber noted in his column for The New York Times, "what was mostly lost in the discussion was just how much it would cost employees if every employer tried to do what AOL did. The answer? Close to $50,000 in today's dollars by the time they retired."

The reason is that over the long-term, stocks tend to rise. So if a company waits until the end of the year to match, in most years, participants lose out on appreciation. Of course, there are always a few rotten years (2008 comes to mind) when participants would be happy not to receive the match until the end of the year. But those loser years are the minority, which is why AOL employees rebelled and forced Armstrong to recant.

But there's a larger problem beyond the matching melee. As highlighted in last year's excellent PBS Frontline documentary "The Retirement Gamble" (pbs.org/wgbh/pages/frontline/

retirement-gamble), one in three Americans has no retirement savings at all; one in two say that they can't save enough; and the demographics of an aging population are making matters worse.

While I could lament the transition from company-funded pension plans to 401(k) plans (suffice it to say that it was not in the workers' best interest), the AOL affair is a good reminder to those who are fortunate enough to have a 401(k), to make the most of them.

Here are a few of the most frequent questions that I field about employer-sponsored retirement accounts:

Now that I am over 591/2 and retired, should I use my 401(k) to pay down my mortgage?

This is a trick question, because it depends on a number of variables, like current income, savings, tax rates, the number of years remaining on your mortgage, your mortgage interest, among many other factors. I would be loath to have someone pay down a mortgage, if it left him or her with a deeply depleted nest egg.

Should I buy company stock in my 401(k)?

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Limit your company stock exposure to 5 percent of your holdings. Sure, the stock may be awesome now, but do you really need to risk your retirement on the company's performance? Since many companies match in stock, it may be helpful to use the auto-rebalance feature that many plans offer to diversify.

I lost my job -- should I use retirement funds to pay down debt, even if I am under 591/2?

Last year, 35 percent of all participants who left their jobs cashed out their accounts, according to Fidelity Investments. More worrying, cash-outs are most prevalent among younger workers, the ones who would most benefit from keeping the money in a tax-deferred retirement account. Among workers from 20 to 39 years of age who left their jobs last year, 41 percent cashed out their 401(k) balances.

While it is tempting to tap retirement funds to pay down debt, the math is lousy. Fidelity says that the average balance of a 401(k) account that was cashed out last year was close to $16,000. Of that, the typical person pocketed just $11,200, assuming 20 percent was withheld for taxes and the 10 percent penalty was assessed. Additionally, the saver no longer gets the compounded growth the savings would have had in a retirement account.

Should I contribute to 401(k) or pay down student loans?

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If the employer provides a match, I suggest making a retirement contribution that will allow you to capture the match. Every other available dollar should be used to aggressively pay down the student loans.

Jill Schlesinger is editor-at-large for CBSMoneyWatch.com. She welcomes emailed comments and questions.

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