By now we all know the obvious. With 401(k)s decreasing 18 percent on average in 2008, boomers will need to take more aggressive steps to make up for lost savings in order to achieve adequate income in retirement.

New research from Hewitt Associates breaks down the specifics: a typical 55-year-old employee with a current average 401(k) savings rate of 10 percent of pay will need to save an additional 12 percent each year until age 65, or work for two more years, to replace what was lost in 2008. The average 40-year-old with a current average 401(k) savings rate of 7 percent must work one more year or save an additional 1 percent of pay per year until age 65.

According to Hewitt, even if employees are able to recoup their losses from the recent market tumble, projected retirement income levels are still expected to fall short. Before the financial downturn, an average 40-year-old with 10 years of service, earning $83,000 at retirement in today’s dollars needed to save enough to provide $104,500 per year in retirement. However, the average 40-year-old was only saving enough to provide $70,500–a $34,000 annual shortfall. Since the financial upheaval, that shortfall has grown to $37,350 a year, or a lump sum amount of approximately $400,000.

“Most Americans were already far from achieving adequate levels of retirement income before the economy collapsed, and for many, the financial downfall has made reaching these goals nearly impossible,” says Rob Reiskytl, Hewitt’s leader of Retirement Plan Strategy and Design. “In today’s economy, employees are stretched to their limit. But the key for workers is to keep saving, and to make sure they are using all the tools and resources they have at their disposal to maximize their retirement savings potential. It also means that many employees–particularly Baby Boomers–may have to make some tough decisions about what retirement looks like. They may need to work longer, part-time, or find other ways to supplement income in retirement to make up for the shortfall.”

How can boomers fill the income gap? According to Hewitt:

  • Don’t Give Up Free Money: Workers should make sure they are contributing enough money to get their full company match. Failure to do so means they are leaving free money on the table. For instance, an employee earning $55,000 in 2009 can receive an extra $43,000 per year during retirement if they contributed enough to their retirement plan each year to get the full company match. If an employer suspends their match–which roughly 3 percent have done–employees should do all they can to maintain if not increase their contributions in order to make up for the reduced company contribution. This will also help bolster their nest egg when the match is reinstated.
  • Put Your Plan on Autopilot: Automatic contribution escalation will increase employees’ 401(k) contribution rates at a minimal rate on an annual basis. Contributing just 1 percent a year more will not seem like such a big impact to their paycheck, but the steady increase in saving rates can increase employee retirement savings by 50 percent or more. According to Hewitt research, about half (53 percent) of employers now offer automatic savings rate escalation in their retirement plans.
  • Diversify Your Assets: Employees need to make sure their portfolios are properly diversified and they should periodically rebalance their savings to make sure they are invested in the right mix of funds. This is particularly true during volatile markets. For employees who are not financially literate, choosing target-date funds or taking advantage of automatic rebalancing tools puts these tasks on autopilot. According to Hewitt research, 77 percent of employers now offer target-date funds and about half (49 percent) offer automatic rebalancing.
  • Take Advantage of Advice: Many companies offer services and tools that can help workers make informed investment choices based on their particular needs. According to Hewitt research, 38 percent of companies offered online, third-party investment advisory services in 2008 and another 43 percent planned to add these services in 2009. In addition, one-fifth (20 percent) of companies currently offer managed accounts, which allow employees to delegate the overall management of their accounts to an outside professional.