I Just Got my Company’s 401(k) Plan Options – What Should I Do?


401(k)’s have been on my mind a lot lately. With a recent career change, I now have an employer that offers a very generous, easy to use and options-filled 401(k). I won’t share which employer or which plan I actually use but, will go through some of the important considerations, options and things to keep an eye.

Which Mutual Fund is Right for my 401(k)?

Most 401(k) plans are designed for the beneficiary to choose a mutual fund from a select group for the plan. The default plan is increasingly becoming popular. These are usually funds that target a desired retirement year. For example, if you wish to retire by 2025, you will likely choose that fund. The fund is designed to be aggressive initially, with a heavier weight in stocks. As you near closer to retirement, it is more weighted towards bonds and cash. This was done largely in response to the financial recession which tied up many retirement accounts in a scary bare market.

Although age based mutual funds might be the default, they may not be the best option for someone who likes to take on a bit more risk. In fact, for myself, in my mid twenties, I want a more aggressive allocation. Keep in mind, I don’t necessarily need to keep up on this everyday, or even every month. These funds are actively managed on my behalf. Unlike a brokerage account, I’m not moving in and out of positions with frequency. Although the option is usually there to move to a different fund.

It Doesn’t Matter How Much but That you Just Contribute!

I found this video by Yahoo Finance to be incredibly offense to the average twenty something trying to save for a comfortable retirement. How many of you actually have an extra $1,000 to save every month in a 401(k)? It’s absolutely irresponsible to tell investors this is the target. Many people my age will be lucky to save an extra $15-20 a paycheck. With our ridiculous student loan payments, credit card bills and incredibly low wages, the vast majority are thinking, $1,000 is way too much.

I Just Got my Company’s 401(k) Plan Options – What Should I Do?

The best strategy will be to start with $10-15 a paycheck. Many baby boomers started with $10-15 and worked their way up to more generous contributions as they got more comfortable budgeting and saving. I wouldn’t expect anybody to be able to set aside $1,000 a month in a 401(k) easily unless you are working a $40,000+ job. Many of my readers though are working minimum wage or are underemployed. $10-15 is a fight. Fight for it!

401(k) Plans are Incredibly Flexible and Easy to Change

Once you enroll, usually through paperwork from getting in touch with human resources, you have plenty of options to stop, put on hold or rejoin the plan at just about anytime. A little bit more reasonable than insurance plans, 401(k) plans will allow you to start at just about any time during employment. If you can, get signed up right at your first paycheck. Getting in the habit makes a difference.

If you get into difficult times, you can scale back the amount of your contributions or remove them completely. During the recession a lot of employees stopped contributing but, in reality you could have put as little as $5 a paycheck. Just think of that coffee or lunch out you were going to get and just keep it for your retirement.

If you are unsure about the various funds available, terms and conditions you can get in touch with your human resources manager and they will provide the paperwork for you. Another option is to contact the fund provider, in my case T. Rowe Price and they will mail the documents to you free of charge.

It Doesn’t Stop with 401(k) Plans – You Need More

It is rather simplistic to suggest that a 401(k) plan is the end all and be all of your investing and retirement career. Although it is incredibly beneficial and an excellent start, it would be wise to take other measures as well. For example, I contribute minimum amounts to several direct stock purchase plans on a monthly basis. I am paid in dividends quarterly. I have also set up certificate of deposit ladders for some fixed income. Finally, I am actively accumulating alternative investments for higher risk and higher return.

It is foolish to expect welfare or social security to take care of you even if it appears to take care of so many others. At the same time, you do only live once (I hate the YOLO acronym) and you should be saving and investing money not only for retirement but for big purchases such as a car, home or small business. If you have planned it all well and saved perhaps you are investing for a summer home, boat or other luxury.

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