“Hey Dad, should I enroll in the 401k at work?”

Without a doubt, kids:

The 401k is an excellent way to save for the “future you”. The 401k is a company-sponsored retirement savings plan named after a section of the U.S. Internal Revenue Code. Employee contributions go into the 401k as pre-tax dollars but are taxed when withdrawn. The plan was designed by the United States Congress to encourage Americans to save for retirement since many employers do not offer pensions anymore.

What is a pension? A pension is a retirement plan that requires an employer to set aside money for a workers’ future, which guarantees a set monthly payment for life or a lump sum payment at retirement. The managing of the funds in a pension is the full responsibility of the “employer”. With the 401k however, the “employee” is responsible for managing the funds, which might seem a little scary. In either case, those funds are invested in the stock market, which are subject to the ups and downs of the market. The hope is that the funds selected outperform the overall market, providing a substantial return on the investment for retirement. How confident are you with managing your investments for your retirement? For most people I’m guessing, “not very”.

Investment advisors like Scarborough Capital Management work directly with employees and their 401k accounts for a fee. They typically have direct access to your account and will direct your 401k contributions across several available funds offered by your employer. This is not a bad option for someone who is not comfortable managing their own account. Know that just because you hire these investment professionals to manage your money doesn’t mean that your portfolio value will never go down. Keep in mind, “you don’t lose money when your investments are down unless you sell them”.

Frankly when the stock market is down you should be buying, not selling.  Look at it this way, “the market is on sale!” If you get worried and stop contributing to your 401k during a “bear” market downturn, you’ll not only miss out on the Buy One Get One (aka: employer match), you’ll miss out on an opportunity to invest in your 401k selections at a lower price. Eliminate your urge to “buy high, sell low” by not worrying about the direction of the market. Stay in the market and continue to invest consistently for the long haul.

Know that the stock market doesn’t go straight up indefinitely, nor does it go straight down indefinitely. If you look at your 401k portfolio on a daily, weekly, or monthly basis, you will undoubtably drive yourself crazy trying to determine if you should buy or sell. Typically, the goal of your financial advisor is to provide diversity in your investments so that over a longer period of time your returns match or exceed the average annual market return of 8% - 10%.

Just because you have financial advisors managing your portfolio doesn’t mean you shouldn’t evaluate the performance of their selections. Frankly, if you are not risk averse, you might find that your selections outperform theirs, as they tend to be relatively conservative, which isn’t necessarily a bad thing. “It’s just not my thing”.

Now getting back to the 401k, the biggest benefit in most instances is the employer match, which means that your employer contributes a certain amount to your retirement savings plan based on the amount you contribute. This is often referred to as “free money”. Why wouldn’t you take advantage of that deal?

In 2025 a new auto enrollment policy will go into effect with 401k’s. All employees who meet their company’s eligibility requirements for a 401k will be automatically enrolled and contribute to their company’s retirement plan. This means that a deduction from an employees’ paycheck will automatically go into the company’s 401k plan without them having to take any action. The big question when this happens is, “what is my automatic 401k contribution being invested in?”

Contribution amounts will be set automatically by the employer. The law will require businesses to set the initial savings amount between 3% and 10% of employee pay with a 1% increase each year until the contribution amount reaches at least 10% to 15%. Employees, however, will have the opportunity to opt out of their company’s 401k plan or make changes to their contribution amount. I don’t know why you would want to opt out, but it will be an option.

Fidelity reports that 485,000 accounts had seven-figure balances, which is a 15% increase from the end of 2023 when there were 422,000 401(k) millionaires. The longer you invest in your 401k the better your chances of becoming a 401k millionaire.

Why wait for 2025 to be automatically enrolled in a 401k at work? Do it now and get your “free money!”