How to set up your 401(k) in 3 easy steps


There are plenty of important questions to ask on your first day of work: Where's the bathroom? What time can I leave? But only one could help you become a millionaire someday. So move this question to the top of your list: How do I enroll in the 401(k)?

Workplace retirement plans are a common benefit: 67% of employees had access to one in 2018, according to figures from the Employee Benefit Research Institute. But only 79% of employees with a workplace plan took advantage.

Most Americans will depend on savings accumulated in a 401(k) or other workplace plan to fund a comfortable postwork life, though. That's why it's so important to start investing as early as possible. And 401(k)s have other advantages: They offer a valuable tax break and many employers match a portion of contributions, which means they give you what amounts to free money that can supercharge your savings.

Making sense of a 401(k) can seem daunting at first. The good news? Signing up doesn't take long, and once that's done, there are just two big decisions to make: How much to contribute, and how to invest that money.

Here's how to get started.

1. Sign up

You might be able to skip this step. Some companies automatically enroll new employees into a 401(k) with a default contribution — either a dollar amount or a small percentage of the employee's salary.

Whether your company automatically enrolls you or not, it's still important to get details about the plan and when you can start contributing. Your first stop to get that info is the human resources department. "Go to HR and find out who the plan sponsor is," says David Reyes, a financial advisor and founder of Reyes Financial Architecture. That information can help you set up an account with that plan sponsor, if you're not already enrolled, or log in to tackle the next steps.

Some employers require you to work at the company for a specified period before you can start contributing to a 401(k). About 4 in 10 companies impose a wait of three months or more, according to data from the Plan Sponsor Council of America.

What is a 401(k) match and how can you take advantage of it?

2. Decide how much to contribute

One reason experts like 401(k) plans so much is because they make it easy to start investing. "They take the guesswork out of when to invest because money comes out of your paycheck automatically," says Christine Benz, director of personal finance at Morningstar. "Turns out, that's a really great way to invest."

Still, you need to decide how much money to contribute each pay period. Experts typically advise you aim to put away 10% to 15% of your salary for retirement each year, but even if you're juggling a lot of other expenses, some is better than none. "Put $50 or $100 in there just so you're used to saving and seeing a statement that has investments in there," Reyes recommends.

As you earn more money, aim to increase your contributions. You can make an annual 401(k) contribution of up to $19,000 (plus an extra $6,000 if you're 50 or older) as of 2019.

It's especially important to contribute to a 401(k) if your employer offers a match. There are a variety of formulas for matching contributions, but the average reached a record high of 4.7% this year, according to data from Fidelity.

That means if you make $50,000 and contribute at least that amount, your company will contribute $2,350 as well.

3. Pick your investments and review fees

There will be a few investment options to select from within your 401(k) plan, typically index funds, like the following:

  • Stock funds. Your options here may include companies of different sizes (small-, mid-, and large-cap stocks) or from different geographic regions (U.S. and international).
  • Bond funds. Options might range from funds representing a large portion of the bond market to specific regions.
  • Target-date retirement funds. These are made up of a mix of investments that changes over time, depending on when you plan to retire.
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When selecting investments, also known as determining your asset allocation, you have two options: The do-it-yourself route, in which you select individual investments from that list of funds, or the hands-off approach of allocating all your funds into one already-mixed target-date fund. Regardless, the goal is to have a variety of assets to balance out potential risks, what's known as diversification.

If you take the DIY approach, you'll need to decide what portion of your portfolio is invested in bonds versus stocks. The Baltimore-based money managers at T. Rowe Price suggest these goals:

  • 20s and 30s: 90% to 100% in stocks (because of your long investment timeline), with up to 10% remaining in bonds.
  • 40s: 80% to 100% in stocks, with up to 20% remaining in bonds.
  • 50s: 60% to 80% in stocks, 20% to 30% in bonds, and up to 10% in cash.
  • 60s: 50% to 65% in stocks, 25% to 35% in bonds, and 5% to 15% in cash.

Target-date funds are popular because they alleviate the stress of figuring out asset allocation yourself. "Sometimes, not overthinking it is the best strategy," Benz says. "You can really muddy the waters by trying to be too tactical."

Sometimes, not overthinking it is the best strategy. You can really muddy the waters by trying to be too tactical.
Christine Benz
director of personal finance at Morningstar

But as you pick investments, pay attention to fees for individual funds and the overall account. The lower, the better. All other things equal, an investor paying annual fees of 1.3% will reach retirement with about $100,000 less than one paying fees of just 0.25%, according to the Center for American Progress.

If you see a lot of offerings in your plan with fees greater than 1%, Benz recommends contributing just enough money to get your employer's match — and then shopping around for alternative ways to invest the rest, like an IRA.

Remember to check in periodically

Many 401(k) providers offer options to help workers automate the retirement-planning process, including automatically increasing contributions each year or rebalancing your portfolio to get back to your desired asset allocation. But it's important to take charge of your retirement planning and even small changes — like a 1% increase in your savings rate — can really add up over time.

So remember to do some checking in on a regular basis.

While you should review your account statements each quarter, resist the urge to make changes to your plan based on what the market is doing. Any major changes, like tweaking your asset allocation, should only happen annually, so long as you are decades from retirement, Reyes says, don't feel like you need to react to every news event: "It's important to remember these are long-term investments."

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