How to Choose a 401K Plan: Three Factors to Consider

Estimated reading time: 3 minutes(Last Updated On: December 23, 2020)

If you’re lucky enough to work for an employer who offers a 401k plan, you’re already ahead of the retirement options curve than most people. A nice perk to most 401k plans is that your employer will typically match up to a certain percentage that you contribute. For instance, if your employer offers a 6% match option, any contribution you personally make up to 6% will essentially be doubled. If you contribute 4%, your employer will contribute 4% as well. If you contribute 8%, your employer will still only contribute that 6% maximum. It is usually recommended that you contribute at least what your company is willing to match because you will be doubling your investment every year at minimum. If you don’t, you’re effectively refusing free money. Having a 401k plan can be a great way to save for retirement. However, if your company offers more than one option, or twenty options, things can get confusing. A mistake people often fall into is just picking one randomly and hoping it works out. Explained below are a few factors to consider before you decide which investment option is best for you.

  1. Your age can determine a lot about how you should invest. Your portfolio should consist of at least a few different investments to increase your chances for growth and also to spread out your risk. Your age will determine the allocation of the funds to riskier investments versus safer investments. If you’re getting started early in life, time can be on your side with the riskier, but highly rewarded, options. If the market dips for a few months, you’ll have time to wait for an upswing and rebuild your wealth. The closer you get to retirement age, the fewer risks you’ll want to take with your soon-to-be needed funds. The portfolio balance should swing from mostly risky in your early life to mostly safe later in life. Your financial advisor can help you determine the balance that is right for you personally. The safer options won’t include as much reward, but you’ve hopefully built a strong account up to that point.

Your age may also determine how much you contribute to your account each year. The earlier you invest, the more time it has to grow. A person who consistently invests a little starting in their 20’s can still earn more by retirement than one who contributes a lot only at the end of their career. If you’ve put off saving for retirement, you may need to contribute more to catch up to your retirement goals.

  1. What you invest in could be restricted to only a few options by your company. Sometimes companies will choose plans that offer investments in their industry, while others prefer U.S. based companies regardless of niche. Plans also may necessitate a minimum initial investment. Some can be $1,000 while others will require $25,000 or more. If you’re just starting out, you may need to build up to the higher investment plans.
  2. Benefits and fees may also help you narrow down a plan. Some plans may offer in-person advice or personal control over the investment, but come with higher fees, while others have automatic or target-date options with fewer associated costs. You may also possess certain knowledge over specific niches that you’re more comfortable investing with, such as technology. In the end, it’s your money and you should feel at least somewhat comfortable with the investment options presented to you.

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