Five Questions to Ask About Your First 401(k)

May 27, 2014 | Updated Jul 27, 2014

Congratulations, Class of 2014! You've earned that college degree, but you still have a few important lessons to learn. Lesson #1: now is the time to start saving for your retirement. I know it may seem a lifetime away, but the earlier you start, the easier the path to a comfortable retirement can be.

So, as you embark on a new career in your post-grad life, it pays to arm yourself with information about how to maximize your retirement savings -- and one of the most common ways to do so is through a workplace 401(k) plan. Below are the top five 401(k) questions to ask your new employer:

1) When can I enroll? Enrollment eligibility varies from company to company. Some employers let you sign up on day one, while others may make you wait up to a year. Whatever the case may be, I'd recommend enrolling as soon as you are allowed. Thanks to the power of compounding, the sooner you start saving, the better.

You might also find that your company's plan offers an auto-enrollment feature, which means that your 401(k) contributions will automatically be withdrawn from your paychecks as soon as you meet the eligibility requirements. That's your employer looking out for you. Let them.

2) Will the company match my contributions? This one is key. Many companies offer some form of matching contribution; it might, for example, take the shape of a 50-cents-on-the-dollar match for every dollar you contribute, up to 6 percent of your salary. If you're fortunate enough to work for a company that offers a match, be sure you contribute enough to take advantage of it in full. Why? You're essentially being paid to save. If you're not contributing up to your company's maximum match, you're leaving money on the table. I always say this should be your number one financial priority, even above paying down debt.

3) What are my investment options? Your 401(k) will likely consist of a wide selection of funds across asset classes, such as large-cap stocks, international stocks and bonds. When choosing the funds for your 401(k) account, you'll want to consider factors like risk tolerance, which should ultimately correspond with the amount of time you'll be in the workforce.

In general, if you're a young worker, you'll want to allocate most of your portfolio to stocks, and over time, gradually move the balance towards more conservative bond and other fixed income investments. A target-date fund, available in many plans, is designed to do that work for you by automatically resetting the mix of stocks, bonds and cash it holds based on the target retirement date. That may be a good choice for somebody just starting out, whose investing needs are still fairly straightforward. If you're in your 20s, consider a Target Date 2050 or Target Date 2055 fund.

Another good tip is to look for low-cost investment options, like index mutual funds and exchange-traded funds. These carry lower investment operating expenses, which means less of your savings will go towards management fees and more will go into your account.

4) Is there any help available to me as I manage my 401(k) account? Choosing investments and setting a savings level can be tricky for anyone, but can be especially daunting for new savers. Luckily, many 401(k) plans offer some form of financial advice that makes recommendations for you based on a number of factors. If your plan offers advice, I'd encourage you to give it a try since it may be more personalized than a target date fund. Our data shows that people who took advantage of independent, professional 401(k) advice tended to increase their savings rate, were better diversified and stayed the course in their investing decisions.*

5) Does the company offer Roth 401(k)? Although traditional 401(k) contributions are made on a pre-tax basis, subject to income tax at withdrawal, Roth 401(k) contributions are made with after-tax money, so that withdrawals of the money in retirement are tax-free, as long as certain criteria are met. This is an option that can make sense for a lot of young workers, who anticipate retiring in a higher tax bracket than when they began their careers. Whether or not it's the right option for you will depend on your situation, but it's certainly worth looking into as you're first getting started. If your plan offers advice, part of the recommendation may include whether or not to use a Roth 401(k).

The moral of the story is, if you're just starting out in your retirement savings journey, ask a lot of questions. In addition to your employer and any professional advice available with the plan, there are plenty of online resources available to help. Congratulations, good luck, and happy saving!

*In-depth behavior analysis of point-in-time advice provided through 401(k) plans serviced by Schwab Retirement Plan Services, Inc., 2010. Retirement plan investment advice is formulated and provided by GuidedChoice Asset Management, Inc.® (GuidedChoice), which is not affiliated with or an agent of Charles Schwab & Co., Inc., a federally registered investment advisor; Schwab Retirement Plan Services, Inc.; or any of their affiliates.


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