Opening a 401(k)? Make These Key Moves ASAP | Smart Switch: Personal Finance

(Maurie Backman)

If you recently started working full time or are in your first job with a larger employer, you may be in the process of signing up for your company’s 401(k) plan. Doing so is important, because you’ll need separate savings to manage your spending in retirement. And the more time you give your savings to grow, the more balance you’re likely to have when you finish your degree.

But if you’re going to make an effort to save on a 401(k) planIt is important to start on the right path. And that means making these essential moves as soon as possible.

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1. Find out what your employer match entails

There’s a reason so many people like to save in a 401(k). Many of the companies that sponsor these plans also match workers’ contributions to varying degrees.

It pays to find out how much you need to contribute to claim that match in full, and then do your best to hit that threshold. Not hooking your entire game is like leaving free money on the table, and that’s not something you want to do.

2. See if your employer imposes a vesting schedule

Employers who invest money in their employees’ 401(k) plans don’t want to get burned. That’s why companies commonly impose vesting schedules that discourage workers from taking their free retirement cash and running. It’s important to see what your company’s vesting schedule looks like, as it could influence the decisions you make about whether to stay or go.

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Your employer may, for example, have a five-year vesting schedule in which you earn 20% of your match dollars each year until you are 100% vested. Or, you may need to stay with your company for a certain period of time before officially gaining ownership of none of that free money. Find out what your company’s policy is so you know what to expect.

3. Find the best funds for your money

When you first open a 401(k), your money will generally land in your plan’s default investment option, which is typically a target date background. These funds adjust for risk as you approach the milestones they’re tied to, making them an easy way to take a lot of the guesswork out of investing.

But target date funds have their drawbacks. Not only do they tend to charge high fees, but they often invest too conservatively, leaving savers with less wealth at the end of their investment window.

Instead of settling for a target date fund, it’s worth exploring other investment options within your employer’s plan. A good option to consider is to put your money in broad markets index funds. Doing so gives you instant diversification without the higher fees you might pay to keep your money in a target date fund.

Saving in a 401(k) is a big step on the road to a secure retirement. Make these key moves early on so you can get the most out of your 401(k) and retire with enough money to reach all of your goals.

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