What’s Under the Hood of My 401(k)?

Not all 401(k)s are created equal. Much like understanding the basic components of the parts under the hood of your car, you should generally be aware of the basic parts of your 401(k) plan to ensure that you know its strengths and weaknesses and can plan your finances accordingly.

Benefits of a 401(k)

Free Money

A 401(k) can be a great way to save for retirement. In 2017 you can save up to $18,000 ($24,000 for those ages 50+) of regular salary deferrals. Many companies also offer a company match. For example, if your company offers a 6% match and you earn $100,000, you would contribute $6,000 and your employer would also contribute $6,000. That’s right, this is “free money!” If your employer offers a match, don’t let it slip away by failing to contribute at least enough to get it.

Automatic Contributions

Another great benefit to saving for retirement using a 401(k) is that it’s automatic: contributions happen before your paycheck is deposited into your bank account. The risk that you forget to save money disappears because you don’t have to do anything. And because you never have to “let go” of money you never received, this form of saving can be much more comfortable than writing a check.

Understanding Your 401(k)

Within the plan, you’ll want to know what type of investment options you have available. Typically you can only invest in the funds that your company offers, although a few plans also offer a companion brokerage account for trading off-plan funds. A limited number of funds might prevent you from investing in all of the available asset classes. Some plans also may not offer many attractive options or have predominantly expensive funds. If you’re curious why your employer’s plan might not be the best, there are a couple reasons to consider: your plan could simply be small and unable to command a better deal or perhaps your company was approached by a very good salesperson who accentuated the positive details to an audience of non-specialists.  A good financial advisor can review and advise on your plan options.

Money Market Funds

Even if you are contributing to your 401(k) currently, you may have automatically been opted into a default investment option such as a money market fund (which is like cash). This is something to check right away. Cash investments make you feel safe from the market’s vagaries, but failing to take enough risk over a long time horizon could be tragic for your investment strategy because the money will probably not grow sufficiently to outpace inflation.

Target Date Funds

If you’re confused about where to put your money in the 401(k), a popular investment options is the target date fund. In a nutshell, target date funds manage the funds for you based on a your likely retirement date. As you get closer to the target withdrawal date, the fund automatically decreases the level of risk (known as the “glide path”). Target date funds are often presented as “set-it-and-forget-it” options and are a very popular choice. However, keep in mind that they can vary significantly from one fund family to another. Funds with the same target date may have considerably different allocations to stock and might even have glide paths and fees that are drastically different. Your own situation and plan can also change a lot throughout your working life. Just because the option is “hands off” doesn’t mean it’s the right one for you.


To summarize, you need to know what funds your retirement plan offers and make sure your money is invested appropriately given your tolerance for risk and when you’ll need the money.

Ready to Check Under the Hood?

If you haven’t checked under the hood of your 401(k) in a long time now is the time to take action. If you’re not sure how to proceed and need help in determining how to invest within your 401(k) or what to do with 401(k)s from previous employers, set up a complimentary call with one of the financial advisers of Alpha Fiduciary in Scottsdale, today.



About Arthur Doglione

Arthur is an industry veteran with more than 20 years of experience working with high-net-worth clients. He has an extensive background in wealth management with particular expertise in portfolio management. Before establishing Alpha Fiduciary, Art was a Senior Vice President with Merrill Lynch where he built his practice to be the largest of Merrill Lynch’s Arizona territory.

Art founded Alpha Fiduciary in 2006 and has completed two acquisitions since then. The firm currently serves clients across many states as a fee-only Registered Investment Advisor (RIA).

Art founded Alpha Fiduciary as a fiduciary advisory firm. This means it has a responsibility to its clients first and foremost.