You have taken the first step and resolved to pay yourself first. Good. Now what?
photo © 2010 Andrew Steele | more info (via: Wylio)
Let’s look at what is inside your 401k. Most plans today have some number of investment choices on the main menu. They are almost all mutual funds. The notable exception may be your company’s stock, if you work for a publicly traded company. Let’s put aside the company stock choice and deal with that in another post.
Your plan may also have a self-directed option which will allow you to “journal” monies off the main menu. In this area you are free to choose for yourself where you want to put your retirement investment. I have seen this option limited to a list of 1,400 more mutual funds; and, other plans where you are free to invest in anything (within limits specified by ERISA laws – basically non-speculative assets. If you could buy it in an IRA it is probably good.). Again, let’s put aside the self-directed choice and deal with that in another post.
That leaves us with the mutual fund choices on the main menu.
No doubt, someone in your human resources department gave you more information on these choices than you wanted. In addition to any hard copy prospectus you were likely given access to online tools as well. Perhaps a retirement planning calculator and an asset allocation model. These are fairly standard tools offered by the 401k plan provider. Now, if you are like most people, you likely feel that this retirement account is more confusing than your company health benefits.
I believe it was for this very reason that what may now be the default investment in your plan ~ Target Date Retirement Funds, or life-cycle funds, came into existence. Prior to the creation of this product, plan participants had to choose from the mutual funds available either the dollar amount or percent of their assets they wanted to invest. Yet, despite the best efforts of the plan provider and human resources to educate employees, it would seem that employees were overwhelmed by all the information and were afraid to make a choice. A survey conducted a number of years ago revealed that the money market account was the major investment across all plans participating in the survey.
This was not good. Not good for the plan participants, the plan sponsor (your company) nor the plan provider. So, plan providers encouraged your company to change the rules. Instead of you choosing where and when to invest your retirement savings account, many plans state that unless you make a choice to the contrary you will automatically be invested in a Target Date Retirement Fund, or life-cycle fund
Enjoy unlimited access to 7 short, video tutorials which will quickly take you step-by-step through this easy process. Videos range in length from 4 to 13 min. averaging about 10 min. Just click here.