Pity the prospective retiree. Social Security is projected to become insolvent in 2041, according to its trustees. Traditional pension plans are terminated, frozen, or underfunded with increasing regularity.

That leaves the 401(k) plan to carry the bulk of the retirement load. The trouble is, though, plenty of research suggests that 401(k) plans, as they are designed at most companies, do a poor job of providing for an adequate retirement on their own. A study by Hewitt Associates found that at companies that provide a 401(k) plan as the only source of retirement benefits, even employees who actively contribute to the plan could face a retirement-income shortfall of nearly 27 percentage points.

"You're going to see a lot of companies that have employees who can't afford to retire," predicts Melodee Webb, vice president of compensation and benefits at Rockwell Collins Inc., an aerospace-design company in Cedar Rapids, Iowa.

Hence the quest for the perfect plan. Smart companies know that if they are going to rely more on 401(k) plans to provide the bulk of retirement savings, they have to make them work better. They are searching for ways to take the muss and fuss out of their plans and encourage more employees to participate.

To be sure, the right plan characteristics depend on the individual company's goals. But widespread agreement on a number of best practices is emerging, regardless of the individual plan. The most often mentioned qualities are the presence of hefty employer matches, the right choice and number of funds, and helpful education and advice for employees.

Other best practices include using automatic enrollment, in which workers can choose to opt out of a 401(k) only after they've been dealt in; automatically hiking contribution rates on a yearly basis or when a raise occurs; and automating investment rebalancing to keep portfolios on target to meet retirement goals. "The best 401(k)s are often those with the simplest design features, both for the plan sponsor and for the participant," says Karen Sanchez, a partner at Sikich Group LLC, a professional services firm in Aurora, Illinois.

Less Is More
During the late-1990s boom, many employers assumed that the way to get employees to put money into their 401(k) accounts was to offer them an ever-expanding array of mutual funds. The stock market's upward spiral, they reasoned, would whet workers' appetites for variety. Fund companies even began to offer brokerage accounts, enabling participants to bet portions of their retirements on any high-flying stock they desired.

Yet when the tech-infused bubble burst, that freedom turned out to be a curse for many plan participants as those risky stocks plummeted. And for others, a plurality of options just led to confusion. Indeed, research has shown that having too many options can actually deter employees from saving for retirement. What happens, according to Columbia University Business School researchers Sheena Iyengar and Wei Jiang, is that employees fall prey to "choice overload."

Faced with a glittering array of alternatives, it seems, consumers go numb. Poring over Vanguard Group records of 647 defined-contribution plans spanning nearly 800,000 employees, Iyengar and Jiang found that for every 10 funds added to a plan's menu, the probability that an employee will take part in a retirement savings plan drops 2 percent. Further, variety might not spice up asset-allocation strategies. The boost in funds apparently made employees more risk-averse, leading them to bump up their contributions to money-market and bond funds by five percentage points and lower their allocations to stock funds by seven to nine percentage points.

Many plan sponsors appear to be getting the message. A consensus seems to be emerging that offering about 12 to 15 core funds is more than enough, and offering "lifestyle" funds — portfolios built to establish sound investment diversification for participants of different ages — might be even better. Thinning the list of funds also eases the compliance burden. "Fulfilling your fiduciary duty can be a daunting and expensive task if you offer 200 funds," says Susan Alford, an executive vice president in the benefits group at Aon Consulting.

Retirement experts generally discourage companies from offering brokerage accounts, which enable participants to trade individual stocks and bonds as well as a broad range of mutual funds. Tom Dunn, CFO of Southwest Power Pool Inc. in Little Rock, Arkansas, doesn't see much benefit to balance what he considers the "tremendous risk" of investing via a brokerage account. Some participants who embark on a round of day trading "may not have the foresight to diversify their holdings," he says. "You could have someone [in a situation in which] when they retire, they have nothing."

Matchmaker, Matchmaker
While simplified investment choices can boost participation, nothing meets that goal as well as a robust employer cash or stock contribution that matches part of what the employee saves. "The existence of a match is the number-one driver for participation," says Alford.

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