How to Invest in 401(k) Plans

If you work for a private employer, chances are you have access to a 401k plan to help you fund your retirement needs. A 401k can be an excellent vehicle for both long-term retirement planning and short-term tax planning, since the money you invest comes off the top of your paycheck before your taxes are computed. Your company might provide a number of incentives, including a company match and automatic enrollment, to encourage you to participate in the plan.

Automatic Enrollment

• Many companies are moving to the automatic enrollment model for their new hires. That means that new workers are automatically enrolled in the company's 401k plan, unless they specifically opt out of the plan. That automatic enrollment model encourages workers to save by making the saving automatic, and since the initial enrollment percentage is often quite small, workers often see little reduction in their paychecks.

Manual Enrollment

• If your company does not use the automatic enrollment model, you will need to enroll in the plan on your own. When you are hired, you should receive a form allowing you to enroll in the 401k plan. This form requests identifying information, such as your name, address and Social Security number, as well as the percentage you wish to invest in the plan. Complete the form and give it to your manager or human resources representative when you are done.

Automatic Escalation

• Many 401k plans now include an automatic escalation feature. This feature means that the percentage invested in the 401k automatically increases each year, up to a maximum level determined by the plan. Workers who opt to enroll in automatic escalation will increase the percentage of their investment each year, and therefore the amount contributed to the plan overall.

Company Match

• One way companies encourage their workers to participate in the 401k plan is through the company match. The company agrees to match a certain percentage of worker contributions, up to a pre-determined maximum level. The amount of the company match varies, but a common arrangement is 50 cents for each dollar of contributions, up to a maximum of 6 percent of earnings. That equates to 3 percent of the worker's pay, so an employee earning $30,000 per year would see a $900 annual company match.

Choosing Funds

• Most 401k plans provide employees with a number of different investment options. These investment options generally include stock funds, bond funds, money market funds and index funds. Many 401k plans also include target date retirement plans which automatically rebalance the percentages of stocks, bonds and fixed income investments as retirement nears. When evaluating funds for your 401k, it is important to look at the performance of the fund, both in the short term and over longer periods of time, as well as the costs associated with owning the fund.