When Jessica Byrne, a 25-year-old software engineer in Portland, Ore., received her first set of 401(k) enrollment papers and was told to choose the investments for her portfolio, she was completely overwhelmed. “It felt like my future was in my hands,” she said. “I had to basically become the Indiana Jones of my 401(k) — it felt dire.”
Byrne, who was 23 at the time, started Googling some of the options, and came across Bogleheads, an investing advice forum inspired by Vanguard founder John Bogle. She shared everything she could, including the choices she had and information about her current accounts, and relied on the advice of strangers who laid out a detailed investment strategy. Years later, Byrne, who now has a blog called Financial Mechanic and is much more literate in investments, said she’s glad she listened, and would have chosen similar investments if asked to do so now.
With a new job comes plenty of paperwork, and if you’re lucky, one of those documents will be about starting a 401(k). It just may not seem like a blessing at the time.
See: 40% of Americans don’t know how their investments are allocated; here’s help
Although the option to invest in an employer-sponsored retirement plan is a great benefit to employees — and not available to many workers — individuals may put off or completely shy away from participating if they don’t understand what they need to do.
New plan participants typically receive a stack of documents, including a sheet that lists available funds and asks the employee to create their own portfolio. They have to choose which funds to invest in, and break down how much of their portfolio they’d like allocated to these funds. Each category may have numerous options, such as two types of large-cap value funds.
This decision does not come easily to many individuals, just as was the case with Byrne. “This experience, if good or bad, can impact whether someone further utilizes their 401(k) or totally gives up,” said Charles Weeks, a financial adviser at Barrister Wealth Management in Philadelphia. But that’s a problem, considering so many Americans are drastically undersaved for retirement, possibly because they don’t have access to appropriate retirement accounts, don’t prioritize retirement saving or simply can’t afford to invest.
Workers could ask their employer if there is a financial adviser available to speak with, but hope isn’t lost if one isn’t easily available. Before you click out of your 401(k) portal or throw your paperwork to the side, consider these suggestions from financial advisers:
Don’t miss: All the ways you can mess up your 401(k) — even if you max out your contributions
Factor your age and when you plan to retire
You don’t need to know the precise year you plan to retire, but having an idea of when that may be will help you invest your portfolio.
Investment firms and financial advisers may follow guidelines, such as these from 401(k) Help Center, a Portland, Ore.-based online resource company for retirement professionals and employees. Someone under 40 years old could invest 100% of their portfolio in equities, dividing it between large cap growth and value funds, small cap growth funds and international funds. An employee between 56 and 60 may want to put half of their portfolio in equities and half in fixed income, the site suggests.
This is general advice. Some investors may be less averse to risk, and willing to keep their portfolio in equities closer to retirement. Instead of splitting a portfolio equally between stocks and bonds, or more conservatively toward bonds, some experts suggest subtracting your age from 100 to get the right mix, where whatever your age is would be the percentage you’re invested in bonds (for example, someone 65 would be 65% invested in bonds and 35% invested in equities).
Research the funds
Not all employers and investment firms offer the same funds. Even when they’re under the same category, like large-cap growth funds for example, they’re not exactly the same. Each fund performs differently, and charges differently too.
Search the available funds on free websites, like FINRA’s Fund Analyzer and MarketWatch’s mutual fund comparison, said Luis Rosa, a financial adviser at Build a Better Financial Future in Las Vegas. Take into consideration annual returns, compare options with one another, and note various fees associated with the fund. There are five common fund costs, including front-end loads (which are charged upon purchase), redemption fees (charged if assets are withdrawn early), annual operating expenses, back-end loads (to be paid upon withdrawal) and wrap account or flat fees, according to FINRA.
Also see: So you’ve maxed out your 401(k)? Here’s where else to save
Target-date funds are a reliable option, some of the time
Target-date funds are earmarked to a specific year for retirement, such as 2055 or 2060, and highly revered by many financial advisers. “Target-date funds are a great choice for early investors with no adviser,” said Nate Creviston, a financial adviser at Capital Advisors in Shaker Heights, Ohio. Target-date funds are broadly diversified, and managed so that investments are initially very aggressive and become progressively conservative as an individual approaches the targeted retirement year. These funds are a default option for some retirement plans, and a go-to option for others who are not interested in selecting their own funds.
But this choice isn’t for everyone. Target-date funds can be costly — ranging in price from 0.15% to more than 1% — which could be dangerous, considering they’re a typical “set it and forget it” type of investment and fees would thus eat away at a portfolio’s potential returns. They’re also not personalized to an individual, and are invested based on an assumption of risk tolerance for a specific age group.
Contribute as much as you can, then strive for more
More companies are beginning to offer auto-enrollment, which means new hires are automatically entered into a 401(k) plan when eligible. The benefit is great for participants who otherwise would not have signed up immediately, or at all, but there’s a caveat: some workers may rely on the contribution rate the company uses, and that rate won’t help employees save enough for retirement.
More than three-quarters of employees in a public-sector supplemental retirement plan would stay in that plan if they were automatically enrolled, according to a Center for State and Local Government Excellence study, and many said they’d increase the contribution rate a few percentage points. For those enrolled with a 1% contribution rate, they’d go up to an average of 5.4%; those who were enrolled with 4% would increase to an average of 6.6%; and enrollees with a 7% rate would alter the rate to just 7.6%. The changes may be in the right direction, but financial advisers suggest Americans save between 15% and 20%.
Not everyone can save that much, but that can be a long-term goal they set for themselves. When starting, advisers suggest contributing as much as you can, and at least meeting the employer match if possible.
Bottom line: Just do something
“Doing something is always better than doing nothing,” said Karen Van Voorhis, director of financial planning at Daniel J. Galli & Associates in Norwell, Mass. Companies often default to a target-date fund when employees don’t choose their own investments, but deferring contributions into the plan is better than to stay out of one, she said. “You can revisit or figure it out better later,” she said, “but so much is lost if you don’t make initial decisions.”
