If you recently started working full-time, or you’re at your first job with a larger employer, you may be in the process of signing up for your company’s 401(k) plan. Doing so is an important thing, because you’ll need independent savings to manage your expenses during retirement. And the more time you give your savings to grow, the higher a balance you’re likely to end up with by the time your career comes to an end.
But if you’re going to make an effort to save in a 401(k) plan, it’s important to start off on the right track. And that means making these essential moves as soon as possible.
1. Find out what your employer matches details
There’s a reason why so many people like saving in a 401(k). Many of the companies that sponsor these plans also match worker contributions to different degrees.
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It pays to find out how much you need to contribute to claim that match in full and then make every effort to hit that threshold. Not snagging your full match is akin to leaving free money on the table, and that’s not something you want to do.
2. See if your employer imposes a vesting schedule
Employers who put money into their employees’ 401(k) plans don’t want to get burned. That’s why companies commonly impose vesting schedules that discourage workers from taking their free retirement cash and running. It’s important to see what your company’s vesting schedule looks like, as it could influence decisions you make about whether to stay or go.
Your employer may, for example, have a five-year vesting schedule where you earn 20% of your matching dollars every year until you’re 100% vested. Or, you may need to stay with your company for a certain amount of time before officially getting ownership of any of that free money. Find out what your company’s policy is so you know what to expect.
3. Find the best funds for your money
When you first open a 401(k), your money will generally land in your plan’s default investment option, which is usually a target date fund. These funds adjust for risk as the milestones they’re pegged to near, making them an easy way to take a lot of the guesswork out of investing.
But target date funds have their drawbacks. Not only do they tend to impose high fees, but they often invest too conservatively, savers with less wealth at the leaving the end of their investing window.
Rather than settle for a target date fund, it pays to explore other investment choices within your employer’s plan. One good option to consider is putting your money into broad-market index funds. Doing so gives you instant diversification without the heftier fees you might pay to keep your money in a target date fund.
Saving in a 401(k) is a great step on the road to retiring securely. Make these key moves early on so you can get the most out of your 401(k) — and retire with enough money to meet all of your goals.
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