401K.102
- Start investing in an appropriate target date fund within your workplace retirement plan (e.g. 401K) while you explore other options.
- Meanwhile, determine an appropriate asset allocation, considering your age and when the money will be needed, your risk tolerance (willingness to take a particular risk), and your risk capacity (ability to take a particular risk), etc.
- Research the fund choices available in the 401K. For example, search the “ticker” on google finance, Morningstar, yahoo finance. You can review the types of companies in a fund, the expenses and the top companies held in each fund, how the performance compares with similar funds in the same category, the prospectus etc.
- Are there acceptable options in the workplace plan for each asset class (e.g. stocks, bonds, domestic, international, small, large, growth, value, REITs) that you’re considering?
- If your workplace plan does not have all the fund types that you want, you may find that option in a company like Vanguard, Fidelity or Chuck Schwab, known for low-cost funds.
- Also, if the fees are more expensive in the workplace plan, perhaps a similar, less expensive fund in Vanguard, Fidelity or Chuck Schwab would be preferable. So long as you contribute enough in the workplace plan to receive all of the match, any excess can be invested in retirement plans outside of your work, like a ROTH IRA or Traditional IRA.
- The employer match is in the “Traditional” pre-tax form which is something to take into consideration if considering diversification when it comes to tax treatment of your retirement funds. For example, having retirement funds in Traditional, ROTH and Taxable accounts.
- Avoid the “Class A” loaded funds. They typically remove about $5 for every $100 that you invest, before the money gets a chance to work for you.
- It is important to have adequate savings outside retirement funds, so that the 401K is only used for its intended purpose – retirement.
- Exit Strategy: When you leave your job, you can roll your balances to another retirement plan (Vanguard, Fidelity, Chuck Schwab) and avoid paying taxes. Don’t take possession of the funds – do a custodian to custodian or direct trustee to trustee transfer. Contact the receiving institution which has an incentive to assist. Traditional 401K funds go to a Traditional IRA; ROTH 401K go to a ROTH IRA. Then start a new workplace plan at your new job.
Resources:
Risk Tolerance vs. Risk Capacity https://www.investopedia.com/advisor-network/articles/020817/understanding-risk-tolerance-and-risk-capacity/