Setting up a 401(k) plan is more challenging than it might seem. It involves a lot of legal documents that need to be drafted, but many businesses outsource this work to a 401(k) service provider.
One of the first things to do is to determine the plan’s beneficiaries. This is an important step that people often need to remember to do.
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1. Decide on a Plan
Whether you’re just starting your career or close to retirement, your employer’s 401(k) plan offers an effective way to save for your future. But deciding how to invest your contribution is just one of the many decisions that go into a successful retirement savings strategy.
You’ll want to choose an investment portfolio that matches your risk tolerance and time horizon. For example, if you’re a long-term investor, it may make sense to diversify your portfolio with investments such as stocks, bonds, and commodities.
That will allow you to capture gains in up markets while protecting against losses in down ones.
On the other hand, if you’re close to retirement, shifting your portfolio toward assets that will provide steady income in down markets might be more appropriate. If you need help with how to go about making these decisions, consider talking with a financial planner.
You’ll also need to decide what happens to your 401(k) plan when you leave a job or retire. You can withdraw the money or roll it over into an IRA. The latter option is generally preferred because it can avoid withdrawal fees and keep the account’s tax-deferred status.
Moreover, it can also maintain the relationship with your former employer if that makes more sense for you.
2. Decide on a Provider
It’s time to choose a provider to manage your 401(k) plan. While this can seem trivial, it’s one of the most important because the right provider will help you and your employees succeed throughout their retirement.
As you evaluate service providers, look at the number of options available, whether the company offers a variety of investment strategies, and how much the total fees are for their services. Typically, prices decrease with the business size (regarding participants or assets under management).
Also, consider additional “hidden” fees often buried in the service agreement and taken from the plan’s support for things such as recordkeeping, investment management, and participant communication. Once you’ve compiled your list of potential candidates, interview each firm about their services and costs. Then, select the provider that best fits your company’s needs and budget.
Ensure your chosen provider has the support and services you need to roll out the plan and educate your employees. This includes an online kick-off meeting and videos and ensuring payroll is set up to defer employee contributions into the new project automatically. Then, once your employees are enrolled, review and communicate the benefits of the new plan to all employees on an ongoing basis.
3. Make Contributions
A 401(k) plan allows employees to save money tax-deferred. This means the money they put into their 401(k) is taxed once they withdraw it, usually after they retire or reach age 59 and 12. Most plans offer employees a selection of investments.
Some programs even let them choose a target retirement date, which can help them focus on saving enough to meet their goal. Many people also start by selecting a risk tolerance level, which lets them know how much of their savings should be invested in stocks and bonds. Then, they might shift the balance toward less-risky options as they near retirement. The next step is to decide how to make contributions to the plan.
Some companies set a default contribution percentage for all employees, but most allow employees to choose their amounts. Some employers may match the first 5% of an employee’s salary, which can be a powerful savings incentive.
Finally, most 401(k) providers will communicate with employees to educate them on the features of their new plan. Many will offer educational videos and other resources, such as a starter kit.
4. Manage Your Account
You can do many things to improve your chances that your 401(k) will meet your retirement goals. You can maximize your employer match, take advantage of catch-up contributions if you are 50 or older, and diversify appropriately.
You can also watch fees, review beneficiaries and avoid unnecessary loans. The nuances of a 401(k) plan can be overwhelming to the new investor, and that’s when it may be wise to consider getting advice from an objective third party.
A financial advisor can help you understand the plan’s features, company policies, applicable fees, and how to make your 401(k) investments align with your overall investment strategy. If you quit or change jobs, remember what to do with any money left in your old 401(k).
You can leave it with the former employer, roll it into your new employer’s plan, move it into an IRA, or cash it out. Choosing the option that preserves your tax-deferred status and minimizes fees is best.