Your first day at a new job is a whirlwind experience. Between meeting new colleagues, learning your way around, and the unavoidable lengthy training from HR, you have a lot to keep you busy. But somewhere buried in that big packet of benefits is information on your new 401(k) plan. Making the right choices can be the difference between a comfort and enjoying your golden years and working far past your target retirement date.
Look for Index Funds
Warren Buffett, arguably the greatest investor of our time, shared how he would want his estate invested for his wife after he passes away. “My advice to the trustee could not be more simple. Put 10% of the cash in short‐term government bonds and 90% in a very low‐cost S&P 500 index fund,” he said.
If it’s good enough for Warren Buffett, it’s good enough for me. While not all companies offer an S&P 500 index fund or short-term government bond fund, many do. If you have this option, it will serve you well.
Target Date Funds are a Good Option
If you can’t choose a low-cost S&P 500 index fund in your 401(k) plan, shame on your employer and administrator. While many investment advisors firmly believe that index funds are the best option, it is not uncommon for a 401(k) plan to offer a menu of mutual fund choices that don’t include low-cost index funds.
However, nearly every 401(k) plan includes a target date fund, sometimes called a destination fund or target retirement fund. These mutual funds are managed by a professional fund manager who chooses a combination of investments optimized for someone expecting to retire at an estimated date. If the fees are not too big, this type of fund is generally a good option.
Mind the Fees
401(k) fees have recently come under fire for charging excessive fees to participants. With fees from large 401(k) providers like Vanguard coming in well under one percent, vocal employees and advocates are speaking out against providers with the most egregious fees.
When you are making your 401(k) investment decisions, take note of the fees and try to avoid funds with the worst fees. It is still better to invest in a 401(k) and pay the fees than not invest, but if you have two reasonably similar options and one has lower fees, go with the lower fee investment.
Don’t Put Too Much in Company Stock
If you believe in your employer and think the business is on track to grow and profit, you can enthusiastically participate in an employee stock purchase plan or purchase company stock in your 401(k). But employees from companies like Enron and Qwest Communications who saw their retirement accounts plummet along with company stock would caution you to avoid going all in.
For long-term success in your retirement accounts, you need a long-term strategy. Putting a little into a stock you can buy at a discount is a great idea, but the bulk of your retirement savings should typically sit in low-cost mutual funds.
Bonus Tip: Rollover Your Old 401(k)
All this talk about 401(k) fees and investments should remind you to rollover your 401(k) accounts from old employers. You can rollover your 401(k) into a new self-directed IRA account at your favorite brokerage. Opening an account like this at Vanguard, Schwab, Fidelity, and other major investment firms is free, and you can invest in any stock, bond, or mutual fund you choose with no employer-imposed restrictions or account fees.
Save Beyond the Match
Most large employers today offer some form of a 401(k) match to employees. These companies generally offer a specific match up to around three percent to six percent of your paycheck. Make sure you take 100 percent advantage of your employer’s match or you are leaving free money on the table.
Whatever you choose for your investments in your 401(k) plan, the most important thing you can do is actually participate. Saving with a 401(k) is automatic and ensures you are doing something to retire comfortably. Saving something is better than nothing, even if the investment choices are not perfect for your needs.
Don’t be intimidated. Don’t put it off. Enroll in your 401(k) plan as quickly as possible and save at least enough to take full advantage of your employer match, if not more. If you do, you are setting yourself up for retirement success.