February 17th, 2013
When first employed and starting a company retirement account, where are your contributions placed initially in most cases? Should you keep them there?
When first employed and starting a company retirement account, where are your contributions placed initially in most cases? Should you keep them there?
Many employers offering a 401k will have a default investment option. They may automatically select a fund for you, many do this to make it simpler to start saving for retirement. However, this selection may not be the best choice for you goals.
I’ve heard of situations where retirement contributions may be held in escrow until a new employee is vested or meets other requirements.
You make some good points, Aaron. Almost all employers have a default and it will almost always be a very safe and low-risk fund. This means a money market fund (cash) or a short-term bond fund with little volatility. Why? They don’t want you blaming them if your account goes down (owning a fund with stocks for example). That is okay and it makes sense from their point of view. It does not make sense from the employee’s point of view. Those funds will produce low returns over time and will struggle just to keep up with inflation (they probably will not).
You want to increase your risk tolerance as you choose stock mutual funds in your retirement accounts . Your time horizon (how long before you will access the money) is long, your ability to handle volatility should be raised in relation to that. This means moving your contributions and your initial assets to a diversified group of index funds (reducing your costs is one of the best ways to increase return) that are heavily weighted to stocks and maybe some bonds. You can do this with only one fund by selecting a Target Retirement Fund with a big number attached to it which will rebalance over the years and reduce the risk of the fund as you near retirement. This one fund can be all you need.
Big point: Just signing up for your company retirement account is not good enough. Educate yourself on the options that are available and put together a plan that will provide for you and your family over the coming decades. Take control of your money or someone else will!