What you Need to Know About your 401k

Matching

The first thing you are going to need to determine is if your employer is matching your contributions.  Not all employers offer this, but if they do, it’s the easiest return on investment you will ever make, so you don’t want to pass it up.  There are a lot of ways your employer can do it but lets look at one of the most common amounts. 

Employer matches 50% up to 5% of salary.

There are two elements here.  The first is the matching ratio.  In this case the employer will put in 50 cents for every dollar that you contribute.  The second is the maximum, which in our scenario is 5% of your salary.  To put this into real numbers imagine you earn $100,000 per year.  If you put $1000 into your 401k your employer will contribute another $500.  If you put in $10,000 your employer will contribute $5,000.  If you contribute $15,000 your employer will still only put in $5,000 because that is 5% of your salary and is their stated maximum.

Deferral Amount

In plain English, this just means how much money you want to take from your paycheck and put into your 401k.  You can generally choose to do this as a flat dollar amount, such as $100 per paycheck, or as a percentage of you overall pay.

Before or After Tax

Most modern 401k’s now provide the option to direct your contributions to either a traditional 401k, or a Roth 401k.  Money put into the traditional side goes in pretax and will lower your current tax bill.  Roth contributions will go in on what is called an after-tax basis, so they will not lower your tax bill right now, but in the future all your withdrawals will be tax free.

Investment Selection

The bulk of your enrollment packet will look something like a menu of all the investment options you can choose from in your plan.  The good news here, is that your plan administrator has already done most of the heavy lifting by selecting that menu from the tens of thousands of investment options out there. 

If your plan has them available, a simple option is to allocate your money towards what are known as target date funds.  These are pre blended diversified investments meant to get less risky as you get closer to your desired retirement date.

If you want to get more involved, you can try blending some of these funds yourself to create a portfolio.  If you do your homework, there is a pretty decent chance this type of investment approach will perform better, but it will require quite a bit more time and effort on your part.

The last option, would be to take your list of options to a fee only fiduciary financial advisor and ask for their input on what investments would bet compliment your existing portfolio.