How to Set Up Your First 401(k): A Step-by-Step Guide

Starting a new job is hectic. You fill out a bunch of paperwork, meet your co-workers and do a variety of other things. Setting up your 401(k) is commonly a part of that paperwork, and it’s easy to fill it out quickly and move on to the next form without any thought. You may be like me when you set up your first 401k; I remember being handed a packet of information, told it would help me save for retirement and had no idea what to do, let alone how to invest my money.

If you’re starting a new job, or still wondering what a 401(k) is, this guide is for you.

How 401(k) Plans Work


A 401(k) is meant for one simple purpose – to help you save for retirement. While the paperwork may seem overwhelming, it’s this one simple thing that 401(k) plans do.

This is how it works. You have money come out of each paycheck on a pre-tax basis, and the IRS allows you to save up to $18,000 per year currently.

This means you never feel the money leave your paycheck and it’s not something you physically have to do – it’s automated for you so each pay period you put a little more towards your retirement savings.

That is where the magic happens. The money goes into your selected investments (we’ll discuss those later) and, hopefully, grows over time.

Your employer may automatically sign you up for your 401(k) and maybe even put you into a specific investment. If they do, and you’re not comfortable with the investment, ask them what you need to do to change it.

Additionally, if you didn’t hear about the 401(k) during your first day, make sure to ask your Human Resources department. More than 90 percent of employees in the country have access to a 401(k) plan, according to Plan Sponsor Council of America, so it’s highly likely your new employer will offer a plan.

Know Your Investment Options


I remember the first 401(k) I could invest in; there were 30-40 options for me to consider. It was overwhelming, and I had no idea where to start. Regardless of the number of investment options you’re dealing with, you may feel the same way.

Don’t let this overwhelming feeling hold you back from investing. That being said, most 401(k) plans have a few basic investment options you can select from, which are:

  • Broad-based index fund. This is a fund that holds all the stocks in a certain index – like S&P 500, the Russell 2000 or the Wilshire 5000 Total Market Index. Funds like these allow you access to entire indices, or the market as a whole and can be a great way to simplify investing in the stock market.
  • Domestic stocks. Depending on your plan, they likely will offer several indices that are made up of domestic stocks. These can be another option to consider if you don’t go with one of the major index funds above.
  • International stocks. Just as many 401(k) plans offer domestic stock funds, many also offer international stock indices. This can be a great way to diversify, but if you’re not comfortable, many of the larger index funds will likely also hold international stocks.
  • Bond funds. Bond funds are generally more secure – though not always. They invest in government or corporate bonds. Most plans will also offer at least a few bond funds as options.

Your employer may also offer two different 401(k) types – Traditional and Roth. Plainly speaking, a Traditional 401(k) gives you a tax benefit now as your money will come out of your paycheck pre-tax.

In a Roth 401(k), the money comes out after tax, so the tax benefit comes when you withdraw the funds upon retirement. There are many other considerations in the Traditional vs Roth 401(k) discussion that we won’t cover here.

If you think you may not be invested in the best options, or think you’re overpaying, Blooom is a free tool that finds savings opportunities and that it’s on the right track – given your investing preferences.

What Should You Invest In?


Again, determining how to invest your 401(k) can be overwhelming. Thankfully, there are many tools available to help you decide what should be in your 401(k).

Nearly every employer I’ve had included helpful tools in their packets to help me set up my 401(k). If your plan does not offer that, there are many free investment tools online that can help you choose how to invest.

Additionally, here are some of the best investing books for beginners that can help you as you grow in your investing.

Your goal should be to invest for the long-term (this is for your retirement after all) as cheaply as possible. Cheap is good when it comes to investing, as it means more of your money is working for you.

Make it Grow


My favorite part of a 401(k) is the match. A 401(k) match works quite simply. Your employer will match a certain amount of money that you put in the plan.

The most common match is 50 percent of your contribution, up to six percent. Meaning, if you put in six percent of each paycheck, they will contribute an additional three percent.

Most experts recommend you invest at least 15 percent of your income to save for retirement. If you get the standard match, you’re already at nine percent with very little effort!

The best kind of money is free money – and that is what the match is – free money. Even if you have a bad 401(k) plan, it pays to contribute enough to get the match, as it’s free money.

The other thing you want to do to make your 401(k) grow is to set up automatic increases. Many plans offer this feature. It allows you to increase your contribution percentage on an annual basis – which is the most common way to do it.

When I worked in my old day job, I would set it to increase by one percent each year, and I’d adjust it at times if I got a larger than anticipated raise. This is also automated, so you have nothing to do but sit back and save more money for retirement.

After you set up your contribution and set up an automatic increase you simply sit back and forget it.

What’s Next?


Now that you have everything set up with your 401(k), there are a few other things to know. You want to set up your investments to rebalance on a regular basis, so they’re not off balance. I prefer to rebalance annually, and most plans will offer that and semi-annual rebalancing.

You also want to know the vesting schedule of the 401(k). This essentially means when all the money becomes yours. The money you put in is always yours, but that’s not always the case with the 401(k) match.

Many employers offer a graduated vesting schedule, meaning every year, more of their contribution becomes yours. My last employer, for example, had a five-year schedule. So, with every work anniversary, 20 percent more became my money.

This may not seem important now, but when you move jobs, it becomes very important. When you leave jobs, you can either leave your 401(k) with your old employer, move it to your new employer or use it to open a Rollover IRA – here’s what you need to know about rolling over an old 401(k) plan.

I tend to prefer moving to the new employer so everything can be in one place. This makes life much simpler, especially if the new employer has a better plan.

It can be difficult to set up your first 401k, but you can do it simply. Here’s how to successfully set up your 401k on your first day of work.

Save Outside Your 401(k)


Congrats, you have your 401(k) set up, you’re saving enough to get the match, and you’re letting time do it’s thing with your money. However, what should you do if you have extra money?

This is a great position to be in, and you can do many things with the extra money, such as:

  • Pay off debt or student loans
  • Save for a future large purchase like a house or car
  • Beef up your emergency fund
  • Save it for something fun, like a vacation

Those are all good options, but if you’re able, the best choice is to invest that extra money. If you’re only putting six percent away in your 401(k) plan, it’s not enough to get you to the amount you will need for retirement, so it makes sense to invest your extra money.

Even if the amount is small, investing in stocks with little money can be done fairly simply. It also provides additional benefits like providing additional diversification or tax diversification if you have a Traditional 401(k) and open a Roth IRA.

If you’re a DIY investor, you can start small with Ally Invest as they have no minimum balance requirements and you can place trades for $4.95.

If you prefer something managed, and closer to what your 401(k) plan is like, you can use Betterment or Wealthsimple. Both will manage your investments for you and are incredibly cheap.

Here’s a list of other automated retirement programs for new investors that provide more options.

Investing extra money outside your 401(k) may seem foolish, or impossible. It’s not. It will grow your money even more and work alongside your 401(k) plan to provide for the type of retirement you want when that time comes.


How difficult was it for you to set up your first 401(k)? Do you invest enough in your current plan to get the match? What resources have you used to help you set up your retirement investing?

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