or millions of American workers, 401(k) plans have become the cornerstone of retirement planning.

Itís easy to understand why. With 401(k) plans, employees can sock away up to $10,000 annually in tax-deferred investment accounts. That means the money you contribute reduces your taxable income. Plus all the earnings grow tax-free until withdrawal. Better yet, more than half of all employers match investments with about 50 cents on your dollar. Thatís free moneyówell, almost.

Whatís not free is that these funds need to be managed. Your 401(k) is unlikely to produce optimum returns on autopilot. The good news is that youíre in control, and the bad news is that youíre in control. To succeed, you need a sound investment strategy, one that reflects your retirement needs, time horizon, and risk-tolerance level. Take the time to manage your funds wisely, and watch your nest egg grow.

Here are some commonly asked questions and answers about managing your 401(k):

How much should I contribute?
As much as you can, as early as you can. If you canít contribute the maximum, some financial planners recommend annual contributions of about 7% of your annual salary. Make every effort to take full advantage of your employerís matching contributionóany money you donít match is virtually thrown away.

Feeling broke? Donít worry, the effect on your take-home pay isnít as bad as you might think. Each dollar you contribute reduces your pay by only 50 cents to 85 cents, depending on your state and federal tax brackets.

Employees may contribute up to $10,000, the IRS maximum in 1999.

What kinds of investment choices
do 401(k) plans offer?

Most 401(k) plans offer at least half a dozen investment choices. Among them: a mix of stock and bond funds, cash instruments, and company stock. Many plans also offer guaranteed investment contracts (GICs), which are issued by insurance companies and pay a fixed rate of interest.

What is asset allocation?
In its simplest sense, itís "not putting all your eggs in one basket." The key is to diversify your portfolio by dividing assets among stocks, bonds, and cash equivalents.

Donít make this decision lightly. "Too many people spend too much time checking the performance of stocks, and not enough time on the asset allocation decision," cautions Malcolm Greenhill, a certified financial planner with San Francisco-based Sterling Futures Inc.

Take advantage of educational opportunities your plan sponsor offers. Many provide simple to sophisticated model portfolios to help you through the process.

Review and update your asset allocation strategy annually or as circumstances dictate. A banner year in the stock market (sound familiar?) means you may need to rebalance your fund allocations to stay within your target range in a particular fund or category.

Can you give me an example?
A conservative investor, age 25 to 45, may have 50% of his or her assets in a stock index fund; 20% in long-term corporate bonds; 15% in short-term bonds; and 15% in growth company stock, according to Richard Sasanow, author of "The 401(k) Book" (ISBN 0805039627; out of print). In contrast, an aggressive investor may hold 65% of his or her assets in an aggressive growth stock fund; 10% in a stock index fund; 10% in long-term corporate bonds; and 15% in international stock.

If you have other retirement assets, like real estate, share certificates/certificates of deposit, and the like, donít forget to include them when determining your asset allocation. Check the Web for sites like SmartMoneyís interactive work sheet to assist in your planning.

How much risk should I assume?
A good rule of thumb: The longer your investment time horizon, the more risk you can accept. Younger investors get the green light from most financial planners to invest more aggressively in stocks that are riskier but pay higher returns. But as retirement approaches, you may want to reduce your stock allocation and shift money to bonds.

Some investors are born risk takers; others are not. Know which you are. Before making any decisions, be sure you have a complete understanding of the risk associated with the various funds in your 401(k) plan.

Understand that seemingly minor differences in rates of return translate into huge dollars over time. Letís say you contribute $5,600 a year to your plan with a modest employer match. Over 30 years, earning a return of 6% annually rather than 8% reduces your account from a potential $1.3 million to $936,000. Thatís $364,000 less for you to spend in retirement.

Remember, youíre in this for the long haul. Donít get preoccupied with day-to-day or week-to-week market gyrations. Itís all part of the game.

Are the funds in my 401(k) off-limits until I retire?
Not completely. But if you tap your funds early, youíll pay a 10% penalty on the amount you withdraw in addition to payment of regular income taxes.

Most companies allow you to borrow against your 401(k), and a growing number of employees are doing so. But be careful: If you lose your job, or get laid off, you must pay off the balance in 30 days or pay federal income tax on the amount you owe plus a 10% early withdrawal penalty.

You must begin to withdraw funds from your 401(k) at age 70 1/2.

What about fees?
Fees associated with running 401(k) plans typically are 1.5% or more. Small company plans may be higher. If you donít know what youíre paying, ask the people in your human resource department.

A new Labor Department booklet provides information to help workers analyze their plan fees. Call 800-998-7542 or read it on-line.

What happens when I leave my job?
When you leave a company, your 401(k) might go with you. You have three options: If you have more than $3,500 in the account, you can leave it in your companyís plan. Or you can roll over the balance into a new employerís plan. If your employer does not have a plan, or you must wait before participating, you can deposit the money into a conduit IRA (individual retirement account).

Is it possible to use the Internet to
manage my 401(k) plan?

A growing number of plan providers are launching Internet sites that allow employees to manage their 401(k) plans via the World Wide Web. Employees can transfer funds, check account balances, and research fund performance with the click of a mouse, seven days a week, 24 hours a day.

The Internet is a good tool to evaluate fund performance. Check out www.morningstar.net for rankings and profiles of 7,000 funds.

©1999 Credit Union National Association Inc.