How to handle a 401(k)

Already participating in a 401(k) plan? Considering enrolling in one, but not sure how to get the biggest bang for your buck? What if you switch jobs? The ins-and-outs of 401(k) plans can seem bewildering. But knowing how to handle your 401(k) is essential to growing savings for retirement income later in life.

 


Jump to learn more about these 401(k) considerations:

Company match | Automation | Allocations | Fees | Rollovers

 


Company match

What is a company match?

Some people consider it to be “free money.” When your employer offers a “company match” on your 401(k) plan, it allows them to make contributions to the plan on your behalf.

Different employers use different formulas to determine how much they will contribute. While some employers may offer a simple dollar-for-dollar match up to a certain amount, other employers might use a tiered-approach, offering different matching percentages for different levels of employee contribution to encourage greater savings. Typically, you have to save a minimum portion of your pay before the employer makes its match. And most plans also have a match limit.

Think of it this way: If you contribute 4% of your annual salary to your 401(k) and your company matches the same amount, you just doubled the amount you’re saving for retirement without having to contribute anything extra. This is why it’s often recommended that you max-out your company match. Otherwise, it’s like leaving money on the table.

I’ve matched the match – is that enough?

Probably not. The match limit should not be taken as advice on how much to invest. Many experts suggest that your annual contribution from all sources – your own contribution and the employer match – should be 10% to 20% of your salary to help prepare for retirement.

What’s vesting?

If your plan offers a company match feature, it may also have “vesting” rules. Vesting is a restriction that some companies place on when you own the match. Think of it as a kind of retirement plan pre-nup: If you leave your employer before a given period of time, they might take back some percentage (or even all) of the contributions that they made on your behalf.

If your plan does provide a company match, you should be able to find out more information about any vesting restrictions in your plan rules and features document, typically available online.

 


Automating your retirement savings plan

Don’t want to have to think so much about your 401(k) plan? Many plans offer features and investment options that can help your savings grow – without requiring extra effort on your part.

Automatic withholding

You probably have auto-pay for your bills. Makes sense that 401(k) plans would have a similar feature. With this feature, you can choose an annual withholding rate that will be automatically deducted from your salary each year. Many plans have an automatic savings rate in place the day your employment begins – so you may already benefit from this feature.

Auto escalation

By using this feature in your plan, you agree to increase your contribution level by a specified amount (usually 1%) each year. This can help make savings goals seem more manageable, particularly early in your career.

When you’re just starting out, it can be hard to justify deferring even a modest percentage of your salary – what with living expenses, student loans, etc. But, considering most people’s annual salaries increase more than 1% year over year, using auto escalation can be a relatively painless way to accumulate greater savings over time.

Target date funds

A target date fund is an investment option that puts your investment strategy on auto-pilot. You choose a fund based on your expected retirement year, and the portfolio manager adjusts the asset allocation on a regular basis to try to maximize the fund’s return based on an age-appropriate level of risk.

It's important to note that, while auto features and investment options are designed to make our lives easier, they aren’t immune from needing occasional course-correction. You should still regularly check on your plan to ensure that your account growth is keeping up with your long-term plans.

 


Choosing allocations

Maybe auto-pilot’s not for you. While target date funds are often chosen as the underlying asset in a 401(k) plan, there are myriad options from which to choose, including alternative investment strategies. In addition, if you plan to go the do-it-yourself route, you might want to consider what kind of retirement portfolio would best suit your needs before beginning the investment selection process.

 


Monitoring fees

401(k) plans aren’t like the savings account you have at your bank. The point of a 401(k) plan is to grow your money over time through investments. And where there’s growth, fees often follow.

Your plan negotiates fees – like the cost of administration and management fees – on your behalf. So while you don’t have complete control over the fees, it’s important to be aware of what you are paying. And, if you are a do-it-yourself-er choosing your own investments, take a look at fees and returns to see if you are getting what you’re paying for.

 


Rollovers

What happens to my 401(k) if I change jobs?

You have some choices to make. If your account balance is above a certain level (typically $5,000), your previous employer may give you the option to keep your investments in its plan. Alternatively, you may want to transfer your old account into your new employer’s plan – that’s called a rollover, or roll-in. Though not all employers will allow a rollover.

A third option is to roll over the money into an individual retirement account (IRA) This may or may not be the right option for you, depending on a number of factors, including fees and how the IRA’s investment options compare to your old and new employer’s 401(k).

If none of the above options appeal to you, you could take a distribution for the full amount of your old 401(k) in cash, subject to taxes and penalties.

 


A 401(k) can be a great way to help save for retirement. And, while it can be a relatively low-effort way to invest, there are also a lot of moving parts to consider. From auto features and company policies to monitoring fees and choosing allocations, it may be wise to consult with a financial advisor to help ensure you’re on track for your long-term goals.