10 Ways to Get the Most Out of Your Company 401(k) Plan

You may not know it, but your company 401(k) probably isn't free. Most 401(k)s pass on administrative fees to the plan participants -- that's you, the saver. In return for those fees, you get access to valuable benefits like employer match, features to help you save, handpicked mutual funds, and more.

Taking advantage of those benefits helps you prepare for retirement, but it also ensures your 401(k) is earning the fees you pay. Follow these 10 strategies to squeeze maximum value from your company 401(k).

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Company match, also known as employer match, is easily the most beneficial feature of your 401(k) plan. Matching contributions are free deposits your employer makes to your retirement savings. The amount you can earn through employer match is based on how much you contribute from your own paycheck.

Employer matching formulas vary from company to company. A common structure offers you $0.50 for every $1 you contribute, up to a maximum of 6% of your salary. Under those rules, you'd earn the full 3% in employer match by setting your own contribution rate at 6% or higher.

The 3% funded by your employer can add tens of thousands to your retirement balance. If you make $50,000, for example, a 3% employer match invested to grow 7% on average will add about $62,000 to your retirement balance in 20 years.

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Vesting is the process of taking ownership of your employer matching contributions. Most employers require you to stay on as an employee for a minimum duration before you fully "own" your employer match. If you leave without fulfilling that requirement, you cannot take your matching contributions with you.

The vesting schedule will often be phased over several years. For example, you might take ownership of 20% of your matching contributions after one year of employment, 40% after two years, and so on until you are fully vested after five years.

If you are looking for a new job before your full vesting date, consider the lost contributions as you weigh your new opportunities. In a role with a much higher salary, you could afford to increase your own contributions substantially -- to make up for the lost matching contributions. But losing employer match for the same salary may only be worth it if you're miserable in your current role.

Auto-escalation is a feature that raises your contribution rate every year. If you can set the increase to hit in the same month you get a raise, you may not even notice the change.

Raising your contribution rate annually will ramp up your retirement savings progress. Say you make $50,000 today and you are contributing 5% of your salary. That's $2,500 annually. If you get a 3% raise next year and increase your contribution rate to 6%, your annual savings go up by $590 -- not including any employer match. The extra $590 you save in that one year can add almost $2,300 to your savings balance after 20 years, assuming market-average growth. In subsequent years, the impact of your annual contribution increases will be even greater as your salary rises.

Use your 401(k) to invest aggressively for growth while you're young. Then, shift to a more conservative approach to protect your wealth as you near retirement.

To make the adjustment from aggressive to conservative investing, you'd change your asset mix. A portfolio that's 90% stocks and 10% bonds, for example, is aggressive -- appropriate if retirement is still decades away. This asset mix should provide great growth potential, along with volatility.

As you near retirement, lower your stock exposure and raise your bond exposure. You'll have lower growth potential this way, but your portfolio balance won't fluctuate as much. That's a good thing. You want your wealth to be stable as you head into retirement. This lowers the chances you'll realize losses when you sell shares to fund your retirement distributions.

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Mutual funds have operating expenses they pass along to you as a shareholder. These are quantified in the fund's expense ratio, a value you can find in your fund's documentation. An expense ratio of 0.05% translates to $5 in fees for every $10,000 you have invested in the fund.

Fund expenses reduce your investment returns. To get an idea of how this works, consider two funds with the same portfolio and different expense structures. Say Fund A has an expense ratio of 1% and Fund B has an expense ratio of 0.20%. Let's assume the underlying assets for both funds grew 10% in the last year. All else being equal, the shareholders of Fund A should realize roughly 9% growth, while Fund B shareholders should higher growth, around 9.8%.

When you choose funds with lower fees, you are choosing funds that deliver a greater portion of investment returns to your bottom line.

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An early withdrawal or 401(k) loan could put your savings goals entirely out of reach. There isn't much room for error in any retirement savings plan -- it takes consistent, long-term investing to amass the wealth you need. Any depletion of funds would be a major setback.

Removing money from a 401(k) also exposes that wealth to creditors. Most creditors cannot seize your 401(k) assets. But that protection falls away if you withdraw from your retirement account and put the cash in your bank account.

If you're in a financial bind, find a different source of cash if you can. Pulling from your 401(k) may leave you facing a big lifestyle downgrade in retirement and potentially gives your creditors a path to collect on their terms.

Your 401(k) is designed for consistent and ongoing contributions. The account scoops the money from your paycheck and invests it in your investment selections automatically. 401(k)s are set up this way because it works. A regular, periodic investment over time is the simplest way to build large amounts of wealth.

Your job as a 401(k) saver is to let this process run. Don't turn off your contributions seasonally or whenever the market takes a turn. If you switch jobs, set up your new 401(k) as soon as you're eligible.

The more consistent you are with contributions, the more you'll earn on your investments and the higher your balance will be at retirement.

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Many 401(k)s provide easy access to personal finance resources, such as planning guides and investment calculators. Check out the resources your plan offers and set aside time to use them.

Try spending an hour a month reading articles about investing. Topics to focus on include asset allocation, diversification, and risk. You might also want to learn more about using target date funds versus index funds to meet your retirement goals.

If you have access to compound earnings or savings goals calculators, use them once or twice annually to check your wealth progress. That'll give you confidence that you're on course for a comfortable retirement.

Rebalancing adjusts your asset mix to a specific target. Let's say you've identified your ideal asset mix right now to be 75% stocks and 25% bonds. You then set your contributions to invest in that ratio.

Over time, your stocks will grow in value while your bonds will remain stable. As your stocks appreciate, they'll account for a higher percentage of your portfolio assets. Your mix might evolve to 85% stocks and 15% bonds, for example. This is more stock-heavy than your target, which means it's also riskier than you want.

To rebalance, you'd sell off enough stocks to bring your exposure back to your 75% target. You'd then use the proceeds to buy bonds. This process, done manually, can be tedious if you hold several funds.

Auto-rebalancing gets you out of this job. Once you set it up, your 401(k) processes the transactions needed to keep your portfolio balanced on the schedule you select.

You can also take advantage of Roth contributions if your 401(k) allows it. Roth contributions have a different tax structure than the traditional paycheck deferrals into your 401(k).

You make traditional contributions with pre-tax dollars, and your qualified retirement withdrawals are taxable. Roth contributions are the opposite. You make Roth contributions with after-tax dollars, but your qualified retirement withdrawals are tax-free.

You benefit most from Roth contributions when your retirement income is higher than your working income. Unfortunately, you probably don't know what your retirement income will be today -- especially if you're early in your career.

Contributing to the Roth and traditional sides of your 401(k) today should provide financial flexibility later. You'll be able to pull from your taxable or tax-free accounts as needed to manage your retirement income taxes.

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Your 401(k) has a range of features designed to support your journey to retirement readiness. Some are straightforward to set up and use, like auto-escalation and auto-rebalancing. Others require more effort or finesse, like fulfilling your vesting requirements or building a suitable, low-cost portfolio from your menu of funds.

Making use of the easy and complex features in your 401(k) ultimately benefits you. But the fees that come with 401(k) investing can also be a nice motivator. You're paying fund fees and, probably, plan administration fees, too. That's as good a reason as any to maximize the value you get in return.

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