Now that the economy is producing jobs at a healthy pace again, if you're changing jobs you may need a refresher course on 401(k) retirement savings plans -- especially if, like many people, it's been years since you've paid much, or any, attention to it.

About 51 million people contribute an average of 8% into these self-directed retirement plans, which have largely replaced company-sponsored pension plans and may now be more important than ever with Social Security reform growing more likely in the coming years.

Experts say too many people fail to take full advantage of their 401(k), through inadequate participation, neglected allocation and unnecessary withdrawals, all of which will very likely crimp retirement finances.

"These make a very large percentage of employees into money managers, whether they thought they were going to be or not," says Don Cassidy, an analyst at

Lipper

.

How They Work

Generally, a person is allowed to contribute a maximum of $13,000 of pre-tax salary, which is invested in an assortment of mutual funds through a company sponsored plan. Many companies match employee contributions, though few exceed 6%.

Though there are limited exceptions, withdrawal prior to the age of 59 1/2 triggers sizable tax penalties. After that, income from 401(k) withdrawals is taxed as ordinary income based on your applicable tax bracket, whether you are employed or retired.

The point of the plan is to maximize investment growth by allowing savers to invest untaxed income, whose return on investment is also untaxed, creating a larger -- assuming good investment selection -- pool of money at the end.

Mark Schwanbeck, a former pension fund manager and author of

Your 401(k) Handbook

, explains it this way: A person earning $30,000 a year sets aside 8%, or $2,400 a year, for his 401(k). That cuts your taxable income to $27,600, which reduces the overall tax burden.

In this example, without the 401(k), you would pay about $7,112 in federal and state taxes, while the 401(k) investor would pay $6,320 -- a savings of almost $800.

Altogether, your disposable income may be cut by $1,609, but you have $2,400 set aside for retirement. If the company matches your contribution -- say 50 cents to the dollar, which is common -- then your annual retirement savings is $3,600.

Play or Pay

Deciding not to participate is the biggest mistake you can make, says Rick Meigs, president of 401khelpcenter.com in Portland, Ore.

"You've got to participate -- it doesn't matter if you think you can't afford it," he says. "If you can make a commitment to putting even a small amount of money in, soon you will not even notice it."

Meigs says non-participation is most common among workers between the ages of 20 and 29; only 55% of that eligible group contributes. (The national average is 68.2% , according to a recent Hewitt report.) And the sooner you start contributing, the sooner -- and thus longer -- your investment can multiply.

"Do at least as much as you have to get the company match," advises Cassidy. That truly is free money which, at the worst, will offset investment losses on your contributions.

Adjust and Adapt

According to Hewitt, many 401(k) investors have no other investments. Yet even those who do -- including those well-versed in building portfolios -- often make their initial investment selections and pay little, if any, attention thereafter.

"The tendency is to check off the boxes when you sign up, stick it in the bottom drawer and hope that at 65, you're OK -- that's not much of an investment strategy," says Cassidy.

Most 401(k) plans offer about 15 choices in a mix of stocks, bonds and money market funds. Even with that relatively limited selection, you should still apply conventional portfolio allocation strategies.

For example, younger people can generally pick investment funds with a more aggressive approach, putting more money into equity funds than bond ones.

The average 401(k) investor has money in 4.1 different funds, but all too often, people don't take the step of rebalancing their allocations each year, which can easily be done by telephone or online at the plan sponsor's Web site.

"You don't need a Ph.D. in economics," says Tom Gryzmala, a financial planner in Charlottesville, Va. "A 401(k) gives you all the benefits of diversification. A 25-year-old guy with an 80-20 mix of growth stocks and bonds has a different outlook than somebody who's about to retire."

Schwanbeck is a big fan of life cycle funds -- mutual funds that invest in stocks and bonds, and adjust their allocations monthly based on investors' age and risk tolerance. Most major fund companies offer them, making it that much easier to adjust your holdings.

What's harder is having the discipline to sell your best performers and reallocate to asset classes that did poorly in the past. That doesn't mean being a slave to the percentages of traditional asset allocation models. Don't be afraid to cut a dud fund loose.

Finally, if you work for a company that uses its own stock for employee matches, avoid letting it become too much of your 401(k) portfolio, warns Cassidy, pointing to the epic collapse of

Enron

, which gutted the retirement accounts of thousands of employees with heavily concentrated retirement accounts. "Keep selling it off to diversify," Cassidy says.

Concentrating in company stock is also risky even if your employer is doing well. "By investing in only company stock, you are subject to a great deal of price volatility," notes Schwanbeck. "Chances are you wouldn't put all your savings into the stock and bonds of some other company."

Look But Don't Touch

Creating a diversified portfolio doesn't protect 401(k) investors from the greatest risk of all: The temptation to tap into that growing pool of money.

You can borrow against your 401(k) to help pay for your children's college tuition, the purchase of a house, or for other reasons in cases of full disability or serious financial hardship. Still, it's best not to withdraw money if you don't have to.

The penalty-free option of such borrowing costs more than it seems, warns Schwanbeck, even when interest rates are low. You still have to repay the borrowed money by making future -- and usually larger -- contributions to the fund.

"You're repaying yourself with money that's already been taxed, so there's a double whammy effect," he says.

Also, borrowed money isn't in your fund ready to appreciate when the markets rally.

Roll Over, Job Switcher

One good reason to touch that 401(k) plan is when you're changing employers.

You can leave the money where it is, transfer it over to your new employer's 401(k) plan or convert it to an individual retirement account.

If you work for a large company, odds are that your plan is bundled up with one of the larger mutual fund companies, which will continue to monitor your retirement investments, Schwanbeck says, as well as offer ample choice.

If you work for a smaller company, or one that merges or goes bankrupt, it could become a problem, says Meigs. "When it's time for you to run that 401(k) down, it'll be out there, but it's hard to find," he says.

The choice between your new 401(k) and an IRA depends on your plans for the money before retirement, Meigs says. A new 401(k) rollover creates a larger balance to borrow against, without penalties for early withdrawal. It also means better service from fund companies, says Schwanbeck.

"I become a mid-level client with them, and I get can extra financial planning assistance," he says.

But many 401(k) plans offer a menu of about 15 funds in their plans, while an IRA opens thousands of options. "There's much greater investment flexibility in an IRA," Meigs says.

Because you can't borrow money from your IRA, it's less attractive for parents of children near-college age, or prospective homebuyers. Older employees taking early retirement can also opt for equal annual payments without penalties.

Catch Up, Plan Ahead

If this refresher course is causing you to despair, don't worry. Tax legislation in 2003 increased the so-called catch-up allowance for participants over 50. You can contribute another $3,000 annually, for a maximum of $16,000 this year, with an additional $1,000 each subsequent year. Do it.

You won't be alone. According to Hewitt, older workers with retirement looming make larger average contributions. By Schwanbeck's estimate, the difference between pretax and net income in a 50-year-old's paycheck means that $3,000 contribution only reduces take-home pay by $2,000.

On the other hand, Schwanbeck also advises being prepared to use your 401(k) money sooner rather than later, and if you do, consider adjusting your asset allocation to reflect that.

Since your savings are available without penalty, starting at 59 1/2 on, but full social security benefits aren't paid out until age 67, you can use your 401(k) withdrawals to help bridge the gap.

But, rather applying the classic 30% stock and 70% bond allocation for that stage in life, keep 40% to 50% in stocks for bigger gains during those years you are drawing down funds.

"The IRS actuarial tables used to stop at 92 -- now they go to over age 100," Schwanbeck says. "You're going to live longer, and you'll have 20 years to figure out what to do when you're totally on your own financially."