I’m sure you’ve already been told many, many times how important it is to invest in a 401(k) if you have one available to you.

While actually investing in a 401(k) is the most important thing, what you do with that money can be almost as important.

All 401(k) plans are different, so the best way to get personal guidance on your specific situation is to talk to a financial advisor or other financial professional. In general, when it comes to asset allocation and fund selection, there are some critical steps you can take to get the most out of your savings.

Take advantage of any employer match

It really depends on your personal situation, but in general, you should be contributing as much as you can.

If you have extenuating circumstances like large amounts of high interest debt, you may consider consulting with a financial advisor on where your 401(k) contributions fit into your larger financial plan. The annual 401(k) contribution limit is $20,500 for 2022.¹

Contributions to 401(k) plans are made with pretax dollars (for traditional 401(k)s), which means that your money and any potential growth will be tax-deferred until you start to tap the funds in retirement. And that is super powerful.

To see how compounding can impact your retirement savings over time, check out our article on the average 401(k) balance by age.

If you are not able to save up to the annual limit, make sure you are at least saving up to the amount of your employer match (if there is one available to you). If you don’t contribute at least enough to get your full match, you’re leaving money on the table.

Successful asset allocation in your 401(k)

So now that we’ve established why it’s important to contribute as much as possible to your 401(k), let’s dive into how to invest that money.

The biggest thing to establish when it comes to investing and managing your 401(k) is your asset allocation strategy. Your 401(k) is part of your net worth and overall retirement plan and portfolio, so broadly speaking, your strategy for your 401(k) should match your overall investing strategy.

The key to selecting an appropriate asset allocation is determining the goals for the assets, the time horizon for those goals and your risk tolerance. If all those factors align between your 401(k) and your overall investment portfolio, then the asset allocation should be very similar between the two portfolios. However, if one of those factors is very different (for example: the time horizon for the 401(k) is much longer than that of a taxable account), that may require a deeper conversation with a financial professional to determine what is actually appropriate.

How to make fund selections in your 401(k)

Having the right asset allocation for your 401(k) is important, but fund selection matters, too. Also, consider paying attention to fees.

Most 401(k)s will have a combination of index funds, target date funds and actively managed funds.,

As a quick refresher: Target date funds are designed to give you a single investment vehicle.² The date in the name of the target date fund is the assumed date of retirement. The asset allocation becomes more conservative as the fund nears the target retirement date; however, the principal value of the fund is never guaranteed. 

An index fund is a type of mutual fund with a portfolio that tracks the holdings of a specific market index, such as the S&P 500. An index mutual fund can provide broad market exposure with lower operating expenses, and lower portfolio turnover. These funds follow their benchmark index regardless of how the markets perform.

An actively managed fund is where investment professionals make decisions about how to invest the fund's assets. The goal of the investment manager is to outperform a designated benchmark while adhering to the fund’s investment objective and guidelines.

What to do with an old 401(k)

Now that we’ve talked about why it’s important to max out your 401(k) and given some rules of thumb around managing it, let’s talk about what to do if you have an old 401(k).

You have a few options available to you. You could stay in your current plan (if the plan allows), move your money to your new employer’s plan (if applicable), roll over to an IRA or even cash out (though, it can put you behind on saving for retirement, and you could face a 10% early withdrawal penalty and other tax consequences).

Consider talking to a financial professional before making your decision because everyone’s situation is unique and there are always exceptions to every rule.

Our take

To recap, the most important actions to take now for successful 401(k) management are:

1. Make sure you are contributing as much as you can afford to your 401(k) or at least taking full advantage of any employer match.
2. If you have a 401(k) administered by Empower, and it’s available with your plan, consider scheduling time with an Empower representative for help on asset allocation and information on the funds available within your specific plan.
3. If you have an old 401(k), consider all your options.