How to Join a 401(k)?
It’s easy to forget to join 401(k) plans when you start a new job. Most companies make it easy to join their 401(k) plan. Here are ten steps to make it easier.
Starting a new job can be stressful. Signing paperwork, touring your new office, meeting your new coworkers; your first day can be a whirlwind. Typically, you sign up for health insurance, flexible spending accounts and configure your tax withholdings. Often overlooked is joining your employer's 401(k) plan.
There's no doubt contributing to your company's 401(k) is a great way to build wealth for retirement. The keys to having a well-funded retirement are time and consistency. Forgetting to join your employer's 401(k) plan can cause a lapse in your retirement saving, potentially costing you further down the road.
Most 401(k) participants are automatically enrolled in their plan. If your company doesn’t auto-enroll you, you may join a 401(k) on your first day, or later by contacting your HR department.
10 Steps to Help You Join Your Employer's 401(k) Plan
Your retirement is in your hands. Although your employer facilitates their 401(k) plan, it's up to you to manage it how you prefer.
Knowing how to join your employer's 401(k) plan and the proper steps to make it fit your goals will go a long way in setting you up for retirement.
1. Know When You're Eligible to Join
The majority of companies that offer a 401(k) plan allow employees to participate immediately upon employment. Chances are your employer will allow you to join their 401(k) plan on your first day.
However, it's wise to check to make sure when you're eligible to join.
If there is a period you'll have to wait, consider contributing to another retirement account with another institution in the meantime. If you have another account already, like an IRA, consider bumping up your contributions to make up for the lost time until you can join your 401(k) plan.
Use this time to learn how your employer's 401(k) plan functions. You may even get information from your human resources department on your first day.
2. Understand Your Vesting Options
If your new employer matches a percentage of your 401(k) contributions, they may not make those funds available until a particular time. Being fully vested means that you are entitled to the full amount of funds your employer has contributed to your 401(k). Leave the company before you're vested, and you'll leave behind the money they've contributed.
Less than 25% of employers who offer matching contributions are immediately vested.
When deciding whether to join a 401(k), understand how long until you are fully vested. If you plan to be with the company shorter than this timeframe, consider another option for your retirement savings.
Since the added benefit of an employer match isn't an option, you may find alternatives that better fit your goals.
3. Sign Up—If Your Employer Hasn't Already
Over half of the companies that offer a 401(k) automatically enroll their employees into the plan. This ensures employees are contributing the bare minimum towards their retirement. Also, this helps lower the costs of facilitating the plan with the institution that manages the fund.
Check with your human resources department if you've automatically been enrolled in their 401(k) plan.
If you have, make sure your information is up-to-date. Verify your mailing address to make sure you're getting your quarterly and annual statements. Also, verify your personal information is correct. Many times age plays a factor in what you’re automatically investing in.
Additionally, ask how you can log into your account online to better manage your investments in the future. Many 401(k) plans use an online portal much like your personal banking system. There you can manage your assets, research different funds, and update your personal information.
4. Choose What Type of 401(k) to Join
It's not well known, but companies can provide two different kinds of 401(k)s.
A traditional 401(k) is the most common investment vehicle. Contributions, both employee and employer match, are made with pre-tax dollars.
Contributions and growth are tax-deferred until retirement.
This lowers your tax burden during your working years but will reduce the amount you keep during retirement.
A Roth 401(k) is slightly different in that you contribute after-tax money into the account. And since you've already paid taxes on the amount you put in, you won't pay taxes when you receive distributions during retirement.
Your employer can still match your contributions; however, their contributions will be taxed during retirement.
Roth 401(k)s aren’t as typical as traditional 401(k)s, but they are a great alternative to keep more of your withdrawals during retirement.
5. Review Your Investment Options
With your 401(k) plan is a menu of different options to invest your money. The typical 401(k) plan offers a variety of funds to invest your money.
Most plans automatically invest your money in what's called a Target-Date Fund. These funds use your age to determine the approximate year you will retire. As you near retirement, the fund is reallocated to match your risk tolerance—shifting gradually away from stocks and more towards bonds.
If Target-Date Funds don't fit your goals, you can opt to invest in other funds.
Mutual funds are a package of stocks and bonds that managers operate. They monitor the market and add and drop different holdings to make the most money.
Because these funds are managed by a professional, they usually come with higher fees—more on that in a bit.
Additionally, review the performance of a mutual fund. It's well known the stock market is hard to predict, and many times mutual fund managers fail to perform.
Review the five, ten, and 15-year histories of these mutual funds to gauge how well it has performed.
Index funds are a special kind of mutual fund. They aren't actively managed like mutual funds.
An index fund's goal is to match a specific index rather than out-perform it. The most common index fund the S&P 500. This fund purchases a percentage of the top 500 stocks on the market.
The theory is if some stocks are down, others are up—thus, hedging your investments and preventing you from losing everything to a few stocks.
6. Review Investment Fees
As mentioned in regards to mutual funds, understanding the fees associated with specific investment options is essential.
Also called Expense Ratios, fees can eat into the growth your 401(k) experiences. Typically, investors want to choose funds whose costs are below 1%.
It can be challenging to find your 401(k) fees if you don't know where to look.
If your 401(k) plan has an online portal, it will disclose the fees of each investment fund available to you.
7. Contribute Enough to Max Your Employers Match
According to a Bureau of Labor Statistics study, the average employer 401(k) match is 3.5% if they provide one.
If your employer offers to match your contributions up to a certain percent, make sure you are taking advantage of this benefit. This can add up to thousands of dollars per year in free money added to your retirement savings.
You're still able to contribute further towards your 401(k) up to the IRS limits.
At the very least, make sure you maximize the amount your employer is willing to match.
8. Rollover Your Old 401(k)s
If you've moved around different companies throughout your career, you most likely have old 401(k)s with former employers.
To ensure you don't lose these accounts, rollover your 401(k)s into your new 401(k) plan. Your human resources department can assist in facilitating the transfer.
When you consolidate your 401(k)s into one account, it's easier to manage your investments and their performance. Additionally, you can make sure your information is up-to-date, and your statements are being sent to the correct place.
9. Monitor Your 401(k)
After you join your employer's 401(k) plan, you need to keep an eye on it.
Not only will you want to check the balance of your 401(k), you may need to move your money to different investments.
Remember, Target-Date Funds reallocate your investments to match your risk tolerance. If you choose to invest in a different fund, you may be unbalanced in certain areas than you want to be.
By checking your 401(k) balance periodically throughout the year, you can stay on top of how your investments are performing.
10. Whatever You Do, Just Join
The biggest mistake people make is not participating in their company's 401(k) plan. Not only are they missing out on the compounding interest, but they're also missing out on their employer's matching contributions.
Setting aside even the minimum amount will have a substantial effect on the amount of money you'll have during retirement.