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How to Set Up a 401(k) Account


Since their inception in 1987, 401(k)s have become the private sector’s most common employer-sponsored retirement plan — the Investment Company Institute says that there are roughly 60 million active participants in 2020. Participating in your company’s 401(k) is a key component of saving for retirement, allowing you to divert a portion of your pre-tax income into an investment account. A financial advisor in your area can answer questions about retirement planning and help you create a plan for your financial needs. If you recently switched jobs or simply have never before contributed to a retirement plan, here are several easy steps to follow for setting up a 401(k) account.

Step 1: Enroll in Your Company’s Plan

If your company offers a 401(k) plan, you may automatically have an account set up for you with a default contribution amount or percentage, which you can change.

If your employer doesn’t automatically enroll you in the plan, you’ll need to contact your human resources department for instructions on setting up an account. You will also want to find out if your company has a waiting period for joining its retirement plan. The IRS stipulates that an employee must be permitted to participate in a qualified retirement plan once they have reached age 21 and have at least one year of service.

Step 2: Choose How Much to Contribute

When deciding how much of your gross income to divert into your 401(k), you’ll want to consider whether your company offers a matching contribution. Financial advisors will typically recommend taking advantage of the company match and using that percentage as a starting point. For example, if your company offers to match up to 5% of your contributions, you would want to contribute at least 5% to qualify for the match.

However, there are limits to how much you can set aside each year. An employee can contribute up to $22,500 to their 401(k) in 2023. Employees who are at least 50 years old can make an additional $7,500 catchup contribution.

Step 3: Pick Your Investments

Once you set up a 401(k), you'll choose your investments.

When it comes time to pick your investments, remember that you aren’t choosing individual stocks to buy. Instead, you’ll be selecting mutual funds, which is pooled money invested in stocks, bonds, cash and other assets.

Unlike an individual retirement account (IRA), a 401(k) plan will offer a limited set of investment options, fewer than 30 on average. While more hands-on investors may split their 401(k) contributions between multiple funds, more and more investors are using target-date funds. These collections of assets are tailored to a specific time horizon — in this case, the year an investor plans to retire. As the target date approaches, the fund’s portfolio will automatically rebalance and shift to assets that carry less risk. In 2018, 77% of people participating in defined contribution plans like 401(k)s used target-date funds, according to Vanguard.

When picking funds, you’ll also want to compare the fees and expenses associated with each by referring to a fund’s fee disclosure notice. The investor is usually charged an asset-based fee — also known as an expense ratio — for the management of their investments, as well as a plan administration fee to cover other services like bookkeeping and legal expenses. The asset-based fee will typically be charged as a percentage of the total assets in an account, while the plan administration fee can be assessed as a flat rate or percentage.

Step 4: Set It, But Don’t Forget It

There are four basic steps for setting up a 401(k).

Once you’ve decided how much to contribute and selected your investments, your retirement savings will begin to grow. Monitoring your 401(k) on a daily basis likely isn’t necessary, but tracking the performance of your investments over an extended period of time can help maximize your returns. Also consider increasing your contributions, especially after receiving raises.

Bottom Line

Setting up a 401(k) is a relatively easy process that can reap major benefits later in life. Once you enroll in your plan, you’ll be tasked with choosing how much to contribute and what kinds of mutual funds you want to invest in. Target-date funds are popular options for hands-off investors who want their risk exposure to automatically diminish as retirement nears.

Tips for Retirement

  • Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • Make sure you take employer match into account when choosing how much to contribute!

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