On a 401(k) mission

In his 20 years of managing clients’ 401(k) plans, Michael T. Scarborough has seen numerous examples of mistakes made by investors who don’t allocate enough of their salaries to saving for retirement.

Seeing investors waste the chance to build retirement savings accounts prompted the chief executive of Scarborough Capital Management Inc. to write a book highlighting the importance of adequately saving for a 401(k) plan by showcasing examples from 20 people.

The idea for the book, “401(k)nowledge: Practical Advice for Retiring on Your Own Terms” (National Underwriter Co., 2008), came about two years ago as the examples of clients’ not taking adequate action with their defined contribution plans piled up. The stories date back to 1989 when Mr. Scarborough began focusing his practice on actively managing 401(k) plans.

“I constantly see people making the same mistakes over and over again,” said Mr. Scarborough, whose Annapolis, Md.-based advisory firm manages about $1 billion in assets. “I want [people] to make conscious decisions.”

Mr. Scarborough downplays the importance of investment choices in a 401(k) plan and said that not appropriating enough is where the mistakes begin. Pension plans perform 2% better in the market than 401(k) accounts, but an increasing number of companies are doing away with the defined benefit model, making it that much more important for investors to set up the right DC plan.

Many workers are getting automatically enrolled into 401(k) plans with a 3% allocation, which is a positive beginning, but increasing that percentage over time is essential, Mr. Scarborough said.

“You don’t have to be a great investor, but you so have to be a good saver,” he said. “The days of the defined benefit plan are long gone.”