Saving Money

The 411 on 401(k)s

You got the job. Congratulations! At the orientation, the benefits office is going to give you a huge booklet about your retirement plan (or a link to a website that would cause a laser printer to catch fire if you tried to print it all). Here’s what not to do: Set the booklet aside, promise to get to it later, and never think about it again.

Here’s what you should do.

Get the maximum employer match

Most 401(k) plans offer a match: you put in some money, your company kicks in some money, too. Nothing should come between you and this money. Always contribute enough to get the maximum match. Say your employer matches 50% of a 6% contribution. That means if you contribute 6% of your salary, the boss will throw in half of that amount, from her own pocket. (Well the company’s pocket, but it’s just as satisfying.). That doesn’t mean 6% is enough to retire on—it’s probably not—but it’s the bare minimum you should even consider.

Choose simple, low-cost investments

Many 401(k) plans offer dozens of mutual funds to choose from. You can ignore the vast majority of them in favor of low-cost stock and bond index funds. Look for an expense ratio under 0.2%.

If your plan offers a low-cost target-date fund, that’s fine, too.

Save aggressively, but pay off high-interest debt first

Saving big for retirement is a good move—unless you’re also paying down credit card or other high-interest debt. Get the match and maintain an emergency fund, and then focus on killing off that debt. It doesn’t make sense to earn 8% on your investments (a good return) while paying 12% on your credit card bill.

Diversify your portfolio

Your company may be a cool place to work (foosball table!) and destined for success. That doesn’t mean you need to put all of your eggs in company stock. By all means participate in an employee stock purchase plan (ESPP) or other stock discount plan, but don’t make it a large percentage of your financial portfolio. If your employer goes out of business, you don’t want your savings to go out of business simultaneously.

When you move on, take your 401(k) with you

Leaving a 401(k) behind at an old job isn’t high on the list of personal finance sins, but it’s rarely a good move, either. It makes it hard to understand your whole portfolio, and you can probably get better, cheaper investment options in an IRA. So roll that old 401(k) over to an IRA. Or, if your new job offers a good 401(k) and accepts incoming rollovers, go ahead and roll the old money into your new 401(k).

Whatever you do, don’t cash it out. You’ll pay a 10% penalty, plus a hefty tax bill. Not cool.

Matthew Amster-Burton is a personal finance columnist at Mint.com and author, most recently, of Child Octopus: Edible Adventures in Hong Kong. Find him on Twitter @Mint_Mamster.