Before You Begin Investing in a 401(k) Plan

The future of Social Security is precarious to say the least and an ominous threat to Americans who made no personal retirement plans on their own. But it’s never too late to begin investing in your own future. One of the most effective tools to insure the you have the money you need for your retirement years is by enrolling in a 401(k) plan. But before you rush to enroll in a plan, take the time to examine your options so that you choose a plan that best meets your needs.

Begin by direct depositing a modest amount of 2-3% of each paycheck. By having it direct-deposited into the plan, you won’t be tempted to spend it elsewhere and after a short time forget the paycheck cut. When you can manage a bigger deduction from your paycheck, increase the percentage being invested into your 401(k) to ensure adequate savings to maintain your current lifestyle in retirement.

Employee Plans
The advantages are many for people who sign on to an employment program. The biggest reward for investing through your employer is that many offer an employee-matching program where a percentage of your contributions will be matched by the company. Failing to take advantage of an employee-matching program is like throwing free money away.

Another perk of enrolling in an employer sponsored program is the access you will have to advice from your personnel department. Employees whose job was to chose the plan particulars will be the most knowledgeable and will be able to explain the funds and packages, along with the fine print and terms of the plan.

Tips for Choosing a Plan
Diversification is the key to all successful investment portfolios. The same goes for your 401(k) package. If there are too many similar funds, too many owned by the same company and little diversity, your investment is at risk of failing to perform at the rate you were planning for an adequate retirement fund. Many companies offer a choice of packages to their employees with varying degrees of risk. Your decision will be based on whether you can afford to gamble for the higher growth or need to play it safe at a slower growth rate. Your investment advisor or personnel department will be able to help you determine which plan is which.

Tips for Monitoring Your Plan
To make the most of your investment, your 401(k) needs to be monitored; you are ultimately your own financial planner when it comes to your retirement portfolio. While it’s true that how well your plan performs is largely dependent on the financial market, diligent oversight can help maintain growth. Read everything you can get your hands on, including blogs and investment journals; watch investment programs and online videos to become familiar with the vocabulary of investing.

Thoroughly read every quarterly statement. Compare the fund performances over several years to comparable ones on a rating website like Morningstar. Learn what companies own your plan funds and check out the top rated mutual funds to help determine the companies you’d most want to include in your portfolio. Examine your options and find out how you can make changes to your plan for better performance and greater diversification.

If your employee sponsored fund becomes out dated or you’re unhappy with the performance, it’s time to speak to your employee resource department about making some changes. Ask your employer to evaluate whether the investments in your plan are appropriate, and if they have or can suggest educational resources to help you make these critical investment decisions. Find out when they last conducted an investment policy review and ask for the minutes from those meetings.

Earn the Employee Match
The quickest and most painless way of boosting the value of your 401(k) is by optimizing your investment to meet the maximum annual tax-free limit (2012 limits: $17k; $22.5k for Americans over age 55) and earn the maximum employer match. Meet the goal every paycheck for the employer’s matching investment and annually for the tax break and you’ll see your retirement fund grow faster.

Stay with It
According to the Bureau of Labor Statistics, the average Americans has fourteen jobs by the age of 40, most when we’re teenagers. If you have multiple opportunities to establish a retirement account, avoid cashing in an account to start a new one. Always transfer your investment to avoid paying penalties and income tax on the withdrawal. The key to building a large retirement nest egg is to keep the compound interest coming and that can only happen if you stick with it.

About the Author: Noreen Ruth is a regular contributor to a variety of financial-related blogs and websites. She specializes in credit and debt-related issues and enjoys educating consumers about the latest rules and regulations, as well as ways to build, improve and maintain good credit. Click here to compare a wide selection of credit card offers, or see a complete list of low APR credit cards at


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