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How to handle 401(k) investments

There are several steps you can take to manage your 401(k) to help maximize your income in retirement.

  • Understand your company’s matching formula
  • Match as much as you can
  • Know if your 401(k) carries a vesting clause that restricts your payout if you leave your job before a certain period
  • Automate your retirement savings plan
  • Choose asset allocations
  • Monitor 401(k) management fees
  • Roll over your 401(k) if you switch jobs

 


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

Company match | Automation | Allocations | Fees | Rollovers

 


What is a company match?

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

Different employers use varying formulas to determine how much they’ll contribute for their 401(k) company match. Among employers, there isn’t necessarily an average 401(k) match. 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 must save a minimum portion of your pay before the employer makes its match. 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. Therefore, it is often recommended that you max out your company match. Otherwise, you may leave money on the table.

Is meeting my company match enough?

Probably not. The 401(k) company match limit shouldn’t be taken as advice on how much to invest. What should your average 401(k) match be? Many experts suggest that your annual contribution from all sources – your own contribution plus the employer match – should be between 10-20% of your salary to help best prepare for retirement.

What is 401(k) vesting?

If your plan offers a 401(k) company match feature, it may also have “vesting” rules. Vesting is a restriction that some companies place on when their match becomes yours to keep. Think of it as a kind of retirement plan prenup: If you leave your employer before a given period, they might take back some percentage (or even all) of the contributions 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.

How to automate your 401(k) investments

If you don’t want to spend a lot of time thinking 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. These options can help you automate your 401(k) investment process:

  • Automatic withholding
  • Auto-escalation
  • Target date funds

Automatic withholding

You may have auto-pay for your bills. 401(k) plans offer a similar feature. You can choose an annual withholding rate that will be automatically deducted from your salary each year and put towards your 401(k). 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 auto-escalation 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 and other expenses. 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 your plan to ensure that your account growth is keeping up with your long-term plans.

How to choose allocations
for your 401(k)

While target date funds are often chosen as the underlying asset in a 401(k) plan, there are myriad of options to choose from, including alternative investment strategies. In addition, if you plan to go the do-it-yourself route, you may want to consider what kind of retirement portfolio would best suit your needs to achieve the best 401(k) investment for you before beginning the investment selection process.

What are 401(k) fees?

Because the point of a 401(k) plan is to grow your money over time through investments, fees are included, since it’s an active investment (and not like a savings account at your bank, which is passive). Your plan negotiates these fees on your behalf. They can include:

  • Fees to cover administrative costs
  • Management fees

While you don’t have complete control over the fees in your 401(k), it’s important to be aware of what you’re paying. If you’re choosing your own investments, look at fees and returns to see that you get what you pay for.

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

If you switch jobs, you may want to transfer your old 401(k) account into your new employer’s plan – known as a rollover, or roll-in. But not all employers will allow a rollover. If you don’t want to roll your account over or you can’t, you still have several options:

  • 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.
  • You can roll over the money into an individual retirement account (IRA). This may or may not be the right option for you, depending on several factors, including fees and how the IRA’s investment options compare to your old and new employers’ 401(k) plans.
  • 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.

How can I get the most out of my 401(k) investments?

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. You must consider auto features, company policies, administrative and management fees, as well as which allocations may be right for you. It may be wise to consult with a financial advisor to help stay on track for your long-term goals.