Opening a 401(k)

Why Enroll?

Enrolling in a 401(k) plan gives you a head start on your long-term financial security. A 401(k) not only provides a mechanism for saving. It also reduces the income taxes you owe now and allows the money in your account to compound tax-deferred. That means that the earlier you enroll and the more you contribute, the greater chance you’ll have of amassing a substantial retirement account.

For example, suppose you contribute $300 per month to your account and earn an 8% rate of return. If you participate for 20 years, the account could be worth $178,184. But if you had enrolled 10 years earlier and contributed at the same rate for 30 years, your account could be worth $450,388.

Earning 8% with your 401(k) investments isn’t a sure thing, of course. Your account may lose value in a down market. And if the investments you choose do not provide at least the average return in a strong market, you may accumulate less than you anticipated. But if you don’t participate at all, you won’t have a retirement account to draw on after you stop working.

Automatic 401(k) Plans are Catching On

In some cases, you can't participate in your employer's 401(k) unless you take the steps necessary to enroll. But a growing number of employers automatically sign up all eligible employees. Three features characterize the basic "automatic" 401(k) plan:

• Automatic Enrollment—Eligible employees are enrolled in the organization’s 401(k) automatically unless they opt-out within a specified period
• Automatic Contribution Rate—A specified percentage of an enrolled employee’s pay is automatically deferred into the organization’s 401(k) plan
• Automatic Investment—Employee contributions are automatically directed to a pre-determined “default” investment such as a balanced fund, lifecycle fund, or professionally managed fund

Automatic 401(k) features are gaining popularity. More than 40% of 401(k) plans with more than 5,000 participants have adopted automatic enrollment. For more information about automatic 401(k)s, visit www.retirementmadesimpler.org, a new resource from FINRA, AARP and the Retirement Security Project.