How to Set Up Your 401(k)
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Every new job comes with a stack of documents to sign, initial and, months later, try to remember where they were hastily tossed. Race too quickly through this first-day ritual and you could be leaving thousands of dollars of employee perks on the table.
If you missed the pitch for the company retirement plan during employee orientation, don’t worry. Unlike some employee benefits, such as opting in for insurance or setting up a flexible spending account, you can enroll in a 401(k) year-round.
If you haven’t enrolled already, consider taking care of this 401(k) business today.
6 steps to managing your 401(k)
Even though 401(k)s are called employer-sponsored retirement plans, employers are pretty hands-off when it comes to the setup process. Each worker is in charge of making the investment decisions in their own account. Here’s your to-do list if you'd like to take advantage of a 401(k).
1. Sign up (if your employer hasn’t done it for you)
Your human resources department will make the introduction and explain the high points of how the plan works. (HR will not — nor is it allowed to — offer you individualized investment advice.) HR will pass the baton to the company’s 401(k) plan administrator — an outside financial firm — to handle the administrative details, such as enrollment, plan management, account statements and so on.
Some employers automatically enroll new employees in the plan. Employers may start with a low contribution amount, such as 2% of an employee’s salary, and they may raise that by 1% annually up to a cap.
You’re allowed to adjust your participation level and investment choices in the 401(k) at any time once you’re enrolled.
If your company has a waiting period before new hires are eligible to enroll, set a calendar reminder for the day you’re allowed to enroll and make sure your paperwork goes through. Don’t give up even one extra moment to earn investment gains.
2. Choose an account type
Traditional 401(k)s are standard at workplaces, but many employers have a Roth 401(k) option, too. The main difference between the two types of plans is when you get your tax break.
Contributions to a traditional 401(k) come out of your paycheck pre-tax, meaning before the IRS takes its cut (thus lowering your income tax bill for the year). You pay income tax on the money when you start making withdrawals in retirement.
Contributions to a Roth 401(k) are made with post-tax dollars. However, you pay no income tax on the money when you start making withdrawals in retirement.
Investment earnings in both types of 401(k)s are not taxed.
Another upside to the Roth 401(k) is that there are no income restrictions on how much you can contribute.
The IRS allows you to stash savings in both a traditional 401(k) and Roth 401(k), which can add tax diversification to your portfolio, as long as you don’t exceed the annual maximum contribution limit.
The limit is $23,500 in 2025. People aged 50 and older can contribute an extra $7,500 as a catch-up contribution. Due to the Secure 2.0 Act, those aged 60, 61, 62 and 63 get a higher catch-up contribution of $11,250. In 2026, the contribution limit is $24,500, with a catch-up contribution of $8,000. Those aged 60, 61, 62, and 63 will have the same higher-catch up contribution of $11,250.
» Learn more about catch-up contributions.
3. Review the investment choices
A 401(k) is simply a container for your retirement savings. What you put into that container (the specific investments) is up to you, within the limits of your plan.
Most plans offer 10 to 20 mutual fund choices, each of which might hold a diverse range of hundreds of investments, such as individual stocks, bonds or cash, chosen based on how closely they hew to a particular strategy (e.g., small growth companies) or market index, such as the S&P 500.
Your company may choose a default investment option (that you can change). For example, it might be a target-date mutual fund that contains a mix of investments that automatically rebalances as you age.
A financial advisor can help you evaluate your options and choose the mix that best fits your long-term goals.
4. Compare investment fees
If you review only one thing about your company retirement plan, make it investment fees (often called “management fees” or “expense ratios”). Funds that charge more than 1% are generally considered expensive.
Participants have less control over plan administrative fees (these go to company that runs the retirement plan), but employees should still be able to see how much it is. Some employers cover this fee; others pass some or all of it on to employees based on the percentage of assets each worker has in their account.
5. Consider contributing enough to get any employer match
Free money — via an employer match — is one of best parts of a 401(k). Contributing enough to get the match is the bare minimum level of participation to shoot for. Beyond that, it depends on the quality of the plan.
A standard employer match is 50% or 100% of your contributions, up to a limit, often 3% to 6% of your salary.
Matching contributions may be subject to a vesting period, which means that if you leave the company before your match vests, you forfeit the match. However, any of your own money that you contribute to the plan will always be yours to keep.
If your company retirement plan offers a suitable array of low-cost investment choices and has low administrative fees, maxing out contributions in a 401(k) often makes sense. It also ensures you get the most value out of the tax-free investment growth and tax savings.
6. Decide whether you want to supplement your savings outside of a 401(k)
You can contribute to multiple types of tax-favored accounts at once. Combining the powers of a 401(k) and an IRA, for example, can supersize your tax savings and future financial freedom.
Contributing to a Roth or traditional IRA is not just for workers stuck with a subpar 401(k). IRAs may offer a more flexibility and control in terms of investment choices (limited only by what the broker offers), better access to investment management tools or lower fees.
More 401(k) resources
This 401(k) calculator can help you figure out how much you should be saving
The NerdWallet IRA vs. 401(k) guide can help you maximize your retirement savings dollars in both types of accounts at once
This quiz can help you decide if it's time to hire a financial advisor to help.
