Managing a 401(k) Plan

If you have a 401(k) account, it is completely your responsibility to manage it, unless you hire someone to manage it for you.

If the realization that your retirement future is resting on your shoulders seems intimidating, you should know that is normal, and there are ways for the task of managing you 401(k) account to be less daunting. One of the ways to ease the burden you feel when thinking about your 401(k) retirement savings is to become more knowledgeable on how to manage your account successfully. This can help you make more educated decisions regarding your retirement funds and ultimately increase your account’s success.

Starting a 401(k) Plan

In most situations, when you become employed at certain jobs, a 401(k) account has already been established by the company and you are given the option to opt into it if you choose to. When you first begin your employment, make sure to read over any paperwork regarding retirement accounts and speak with your human resources (HR) representative about whether or not the company offers a 401(k) and what the conditions of that account are in addition to the enrollment terms.

The 401(k) account that you are provided with will likely already be set up a certain way. The amount of money you are expected to contribute from each paycheck may already be determined, and you may also have been given a default investment option as well. These default options are not customized to your personal financial situation and needs, so it is important to make adjustments so that the plan works better for you.

Choosing Your Elective Salary Deferral Amount

When you are enrolling into the account, one of the first things you need to do is choose what amount of earnings you want to contribute to the account, also known as your “elective salary deferral” amount. You will be able to have a certain percentage of your paychecks deducted and placed into your 401(k), and that amount is completely up to you as long as the amount of money you choose to have deferred from your salary will not cause you to exceed the annual contribution limit.

Many 401(k) plans have the added benefit of employer contributions. An employer matching contribution is when the employer decides to match a certain percentage of what you personally contribute to your account. Some companies have a maximum amount that they will contribute, and they may also only contribute money after you have been with the company for a certain amount of time, also referred to as being “fully vested.” Determining whether or not your employer will match your contributions should help you to decide what amount of money you contribute to your account in order to take advantage of the employer contributions.

Choosing Your Investments

In addition to determining what your elective salary deferral amount is, you will also need to decide what investment accounts you want your money in when you officially open your account. Oftentimes, your employer will provide you with a list of other investment options that you can choose from. These options will likely include investment opportunities such as stocks, bonds, money-market funds and more. You should understand that you are always able to alter where your funds are being invested, and that it can be beneficial to consult a broker or other financial professional when determining what investments to choose if you are not sure.

Automatic Enrollment

Although in most cases you are initially given the option to enroll into a 401(k), some companies utilize automatic enrollment. Automatic enrollment allows an employer to automatically enroll you into a 401(k) plan and determine what percentage of wages are deducted from your income and allocated into the account. However, you will be made aware of this automatic enrollment before any of your wages are deducted. You do have the option to opt out of the 401(k) plan or adjust the amount that you contribute.

How to Manage a 401(k) Account

All 401(k) plans can be managed by you in some capacity, and almost all 401(k) plans can be managed online through your plan’s website. It is crucial that you discover what method can be used to manage your 401(k) account and ensure that you set aside time to assess and manage your account every so often.

Part of managing your account includes adjusting your withholdings. Perhaps you decided to contribute 4 percent of your earnings to your 401(k) account years ago, but now you are in a better financial situation and could contribute more. Adjusting the amount that you contribute to your plan is very important since you may miss out on a large sum of money if you do not increase your elective salary deferral amount if you are able to, especially if your employer will match some of your contributions.

You must also manage your investments when you have a 401(k) account. Some investment options are riskier than others, so you should choose wisely when determining where to place your savings. In many cases, younger individuals will invest into riskier assets because they have more time to ride the ups and downs involved with more volatile options, and more time to recover if money is lost in the investment. Oftentimes, older 401(k) holders will place a larger portion of their retirement funds into safer options such as bonds. However, it is completely up to you to determine where you allocate your funds. You just must ensure that you are checking on your account and making adjustments as necessary.

Taking on an active role with your 401(k) retirement savings account is very important because the money in that account will greatly impact your retirement and the lifestyle you will have once you are no longer employed. It is never too early or too late to get more involved in your retirement savings and contribute more money. Plus, it is getting easier to manage your account, especially through online websites that allow you to make changes faster and from the comfort of your own home. You will find that after you have some experience managing your 401(k) account, the process will get much easier and more comfortable and you will be able to make more educated decisions.

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