Another topic about how to be a responsible adult?! Come on. Ok, what if I told you there might be free money involved? What if I told you I’ll teach you how to keep more of your money?
Well whether you’re getting into your first job or you are ready to start contributing to your retirement, the most common starting point is going to be your 401(k) plan at work (or 401(b) for non-profit folks). If you’re working for anyone but yourself, you likely have access to one of these.
What Exactly is a 401(k)?
This is a program sponsored by your employer that allows you to leverage a tax-advantaged retirement plan. These plans are even better when they include a match on the dollars you invest (also known as free money!).
Funds
Depending on your plan, you’ll have various options available, which can also be overwhelming. Target Date Funds have become a trendy investment vehicle due to the hands-off nature of them. You can read more of that here.
How Much Can I Contribute?
In 2020, the individual contribution limit is $19,500. This amount does not include any company contributions (match). Pay attention to any contributions your employer is making and what the match is. Some will do a percentage of your contribution or match up to a certain percent or dollar amount. Taking advantage of this is a massive benefit for your long-term planning.
Fees
Depending on the size of your company, the fees of your plan will vary. Smaller companies tend to have higher fees due to their scale. Either chat with your HR partner or dive into the documentation of your benefits. I would start with the former as the latter can be a bit cumbersome. Your HR partner should at least be able to get you pointed in the right direction or get you in touch with someone more knowledgeable.
If the “401(k) fee” is less than 1%, you’re in good shape, which you can read about here. Getting anything over 1% may determine how many of your dollars you invest here versus other avenues like an IRA. Taking the time to find and understand these fees, on its own, is an excellent step in financial competence. This is also why it can be greatly beneficial to rollover 401(k)’s when you leave an employer. Given the fees associated with these programs, I almost always recommend rolling them over to take advantage of lower costs. I’m hoping in the future these fees are significantly reduced or eliminated. For now, the best thing you can do is pay attention and act accordingly.
How Do I Start?
Either refer to your company handbook or talk to a partner within your HR team. You should be able to set up a direct deposit to have that contribution taken directly from your paycheck – you’re investing without even thinking, always a good thing.
The next step will be to pick the amount of contribution and which funds to invest in. Everyone’s situation is different, but if your employer has a match, you definitely want to take advantage of that as I noted above.
Tools
Personal Capital – This is a great website you can use for free. It will give you great insight into how your funds are performing, the fees involved, and assess your portfolio’s health. This is great for those who have already been investing for a few years to benchmark your performance.
Employee Assistance Program (EAP) – Many companies offer an EAP that you might think is for traumatic situations. Many of these programs will provide options for financial assistance as well. If you’re having issues getting started, this could be a good place for help.
Mtn Money Master Coaching – I work with clients by understanding their financial situation and educating them to make intelligent financial decisions for themselves and the essential people in their circle.
Conclusion
401(k)’s are popular and for good reason. Many employers will include a match in their 401(k) program, which is like adding to your salary. 401(k)’s also offer high annual contribution ceilings with tax advantages. If you’re just getting started with investing, your 401(k) is a great place to start.
