Employees who contribute to their 401(k) plan and who are willing to make small improvements to their saving and investing habits can make a significant impact in maintaining their standard of living after retirement and increasing their future income potential, according to new research from Hewitt Associates.

When factoring in inflation and increases in medical costs, Hewitt predicts that employees will need to replace, on average, 126 percent of their final pay at retirement—significantly more than the traditional targets of 70 to 90 percent pay replacement. According to Hewitt's study, which examined the projected retirement levels of nearly 2 million employees at 72 large U.S. companies using actual employee balances and behaviors, less than one in five (19 percent) will be able to meet 100 percent of their estimated needs in retirement. On average, employees are projected to replace just 85 percent of their income in retirement.

Employees who contribute an average of 8 percent of pay to their 401(k) plan can replace 96 percent of their preretirement income at age 65, providing approximately 80 percent of what is needed to provide the same standard of living during retirement, Hewitt finds. That number drops to just 54 percent for those employees who do not contribute, which equates to less than 40 percent of projected needs. Even employees who have a pension plan may expect to replace just 62 percent of their income at retirement if they do not contribute to their 401(k) plan, compared to 106 percent for those who do contribute. Recent Hewitt research also shows that more than a quarter (26 percent) of employees do not participate in their 401(k) plan, and of those that do, most (61 percent) contribute less than 7 percent a year.