Keep The Course: Don’t Let That Enrollment Kit Scare You—4 Easy Steps To Get Started On Your 401(k)

401kBasics is starting a new weekly series called “Keep the Course”, which is designed to give the average consumer information on how to keep their 401k plan on track! Each Wednesday we’ll post a new article. Your feedback or suggestions on future articles is welcome. The first article of our series is making sure you enroll in that 401k plan!

So you’ve started a new job, and the first thing you’re handed on orientation day is a massive packet of paperwork. There are forms for health insurance, dental insurance, life insurance, and last but not least, that 401k Enrollment Kit. Well don’t be overwhelmed, because here are four easy steps to get started:

1. The first step is to decide how much you’re going to put into the 401k plan. If your company is matching your contributions, then make sure you are getting the full match. At my company, I have to defer 6% to receive the maximum 3% match. So don’t miss out on this benefit, which is essentially free money. If you can afford more, then by all means up your deferral rate, because whatever you put into this plan is tax deferred until you withdraw it.

2. The second step is to decide where your money is going to be invested once it goes into your 401k plan. This is referred to as your asset allocation or investment election. Your company gives you a list of options (typically mutual funds) and you have to divide up your money among those investment options, in the form of percentages, totaling 100%.

The general rule of thumb is to create a diversified portfolio by selecting at least 4-6 investment options. Another general rule of thumb is that the younger you are, the more time you have until retirement, so the more risk you can take on. So what does that mean? It means invest more heavily in stock. Some suggest that you subtract your age from 100, and that’s the percent you should put in stock. There will be, without a doubt, more than one type of stock fund in your 401k plan. So choose to invest a little in each type. For example, put 25% in a Large Cap, 25% in a Small Cap and another 25% in an International Fund. The remaining 25% would go in bonds or cash equivalent investments such as a stable value fund or money market fund.

3. The third step, is to set up your 401k plan on auto-pilot through automatic rebalancing. This is a feature that will make sure your 401k plan stays on course. Through market fluctuation, some funds will outperform others, and the percent you have invested in each fund will no longer match your asset allocations. The automatic rebalancing will transfer funds (typically on a quarterly basis) for you so that they mirror your asset allocations that you established in step two.

4. The final step, which many people over look, is to designate a beneficiary. If you’re married, then your spouse is automatically your sole beneficiary, so be sure to fill out the form or provide your spouse’s information to your 401k service provider. If you decide to have someone else as your beneficiary, then you’ll need notarized spousal consent in order to do so. Either way, whoever your beneficiary is going to be, needs to be comunicated to your employer and/or service provider before any money hits your account.

So there it is! The four steps anyone will need to get started on that pesky 401k plan. A growing trend nowadays is for companies to offer investment advisors to direct you—often times at no extra charge! So be sure to take advantage of the free advice and again, don’t let that Enrollment Kit scare you away!

This site is for entertainment purposes only. 401kbasics and it’s authors are not financial advisors and no information found on this site should be construed as financial advice.

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