How to handle 401(k) investments

A 401(k) plan 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 may want to consider whether the plan has automatic features, your company’s policies, the applicable administrative and management fees, and which allocations might be right for you. It may be wise to consult with a financial advisor to help stay on track for your financial goals.

There are several steps you can take to manage your 401(k) plan to help meet your retirement goals. Start by understanding your company’s matching formula, if applicable, and the potential impact that could have on your savings. Also consider whether your 401(k) plan has a vesting schedule, which could impact your account balance if you leave your job before a certain period. Finally, consider automating your retirement savings plan and choosing asset allocations that meet your needs.

What is a company match?

When your employer offers a “company match” of your contributions into your 401(k) plan, it allows the company to make contributions to the plan on your behalf.

Different employers use varying formulas to determine how much they’ll contribute for their company match. While some 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 contributions 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) plan and your company matches the same amount, you potentially just doubled the amount you’re saving for retirement without contributing anything extra. Therefore, it is often recommended that you max out your company match. Otherwise, you might leave money on the table.

  • That depends on many factors, but maybe not. The company match limit shouldn’t be taken as advice on how much to invest. What should your average 401(k) plan contribution be? It depends on your own unique retirement goals and other sources of savings. You might want to aim for your annual contribution from all sources — your own contribution plus the employer match — to be between 10% and 20% of your salary to help best prepare for retirement.

  • If your 401(k) plan offers a 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. If you leave your employer before a given period, the company might take back all or some of the contributions it 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:

  • 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.

  • 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.

  • 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.

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 see if your account growth is keeping up with your long-term goals.

How to choose investments for your 401(k) plan

While target date funds are often chosen as investment options in a 401(k) plan, there may be myriad 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.

Be aware of the fees associated with your plan

The goal of investing in a 401(k) plan is to grow your money over time through investments. Because it’s an active investment (and not like a savings account at your bank, which is passive), there are fees included. Your plan negotiates these fees on your behalf. They can include amounts needed to cover administrative costs and management expenses. While you don’t have complete control over the fees in your 401(k) plan, it’s important to be aware of what you’re paying. If you’re choosing your own investments, look at fees and returns to ensure that you get what you pay for.

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

If you switch jobs, you may want to transfer your old 401(k) plan 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 may 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.

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