You don’t need to be intimidated when your company asks you to pick investments.
When Jessica Byrne, a 25-year-old software engineer in Portland, Ore., received her first set of 401 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 — it felt dire.”
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.
Investment firms and financial advisers may follow guidelines, such as these from 401 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.
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 , redemption fees , annual operating expenses, back-end loads and wrap account or flat fees, according to FINRA.
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.
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