How To Open Your Employee 401(k) Account

You’ve finally landed your first (or next) job — congratulations! 

Onboarding with your new employer is going to entail a lot of administrative work, for health insurance, direct deposit, filling out a new W4, I-9, HSA, and other alphabet soup-sounding things. 

And all of that is on top of doing what you were hired to do — your new job!

But one of the most important things to tick off is your 401(k). 

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Step 1. Sign Up

The first thing is the easiest and became easier with the SECURE Act 2.0 of 2022. 

Unless you work for a business with fewer than 10 employees, a startup under three years old, a religious organization, or a government entity, you were likely automatically enrolled in your company 401(k) plan. 

While the law will mandate automatic enrollments in 2025, most plan administrators are ahead of the curve and already automatically enrolling new employees — even for plans that are legally exempt.

If you do work for an exempt organization or one that is simply lagging in auto-enrollments, signing up is easy to do. It’s driven by your company’s plan administrator, which is an outside financial firm that manages your employer’s 401(k).

If you’ve already had your job for a while, but never signed up for your 401(k), you can do so at any time. You don’t need to wait for an open enrollment period. You can start today.

READ MORE: How To Find Your Old 401(k)

Step 2. Choose Roth or Traditional

Most 401(k) plans now offer a Roth 401(k) option in addition to a traditional one. 

The difference mirrors that of Roth and traditional IRAs: 

• Roth accounts are funded with after-tax dollars but can be distributed tax-free after age 59½. 
• Traditional contributions go in pre-tax and grow tax-free, but come out as taxable income after age 59½. 

Historically, employer matching funds were all traditional, but the SECURE Act 2.0 allows employers to offer matching funds as Roth contributions. 

Be aware that while the law allows for Roth employer matching funds, employers are under no obligation to offer Roth options in either contributions or matching. 

Your specific tax situation will likely determine which is better for you. Most financial advisors will encourage:

• Roth contributions for younger workers or workers in lower tax brackets 
• Traditional contributions for higher earners in higher tax brackets

If you’re just starting your career, decades of tax-free growth are a no-brainer. But if you’re already in a high tax bracket, the pre-tax contribution may be more valuable.

READ MORE: What Is a 401(k)? Comparing Roth vs. Traditional Plans

Step 3. Determine Your Contribution Amount

If you were auto-enrolled, your paycheck deduction was automatically set between 3% and 10%. 

It will likely increase annually by 1% to no less than 10% and no more than 15%. 

Most advisors will simplify that to “contribute at least 15%.” If you have your eye on early retirement, you may want to save even more. 

Or, if you have high-interest debts, you may want to contribute just enough to get your match and focus on debt elimination before ramping up your savings rate. 

READ MORE: Should You Pay Off Debt or Invest?

Step 4. Collect Free Money!

Many employers offer matching funds or direct contributions to their employee 401(k) accounts. 

Matching funds

Read your plan document to determine your required contribution to get your full match. Most will be listed as a matching percentage up to a maximum of your annual salary. 

For example, a “50% match up to 3%” means your employer will match half of whatever you put in, up to a maximum of 3% of your salary.

You would need to contribute 6% to get their match of 3%, for a total savings rate of 9%.

Here’s how that looks with dollars. Let’s say your salary is $65,000. That means your employer would match up to $1,950. 

You would need to contribute double that (since they’re matching half) to max out their match: $3,900.

When you add yours plus your employer’s together, that gives you $5,850 for the year.

Add in the magic of compound growth, and that $5,850 can turn into spectacular savings over your career.

Direct contributions

A direct employer contribution is simply a contribution to your 401(k) that doesn’t require you to contribute anything to receive it. 

It is sometimes tied to specific company performance metrics, like a bonus. 

Your plan documents will detail any company contributions.

Step 5. Select Your Investments

401(k)s typically offer a selection of investment options suitable for employees at all stages of life. 

These selections run the range from simple target date funds and low-cost index funds to actively traded mutual funds, specialty sector funds, and employee stock purchase plans. 

For new or inexperienced investors, target date funds are a good choice. They’re also the typical default investment for auto-enrolled employees. 

More experienced investors might choose a portfolio of index or active mutual funds. 

Some employees may have an affinity for a specific sector or even their company stock. 

But be aware that being heavily weighted in your own company’s stock or sector is a risky move since both your income and your retirement could be at risk if your company fails (see: Enron employees, 2001). 

Most financial advisors suggest capping your employer stock between 5% and 10% of your overall portfolio.

READ MORE: How To Build Your Core Portfolio

Step 6. Check Your Fees

There are usually few fees from the plan administrator for participating in a 401(k), but individual investments have expense ratios for owning those investments. 

These are typically expressed as a percentage. For example, the fund FXAIX (Fidelity 500 Index Fund), which is common in 401(k)s, has an expense ratio of 0.015% — that’s just $0.15 per $1,000 annually. 

An active fund might have an expense ratio of 0.44%, which works out to $4.40 per $1,000 annually. Expense ratios of 0.75% and higher aren’t uncommon.

When you factor out fees, few active funds can beat their respective index over the long term and higher fees are a drag on your portfolio. 

In general, lower-fee funds are desirable for your core portfolio.

Step 7. Name Your Beneficiaries

Inevitably, you will pass away. Hopefully at the end of a long and fruitful life but that isn’t something to be counted on. 

Like any other financial account, your 401(k) has a beneficiary designation to assign your assets to someone else upon your death. Be sure to designate beneficiaries and review them annually.  

FAQs

What are the requirements to open a 401(k) account? 

You need to be an eligible employee at your company with a year of service. Many plans waive the service requirement and allow participation immediately upon hire.

Can you open a 401(k) without an employer?

No. However, if you are self-employed, you can open a solo 401(k), which is available at many brokerages. 

Annual contribution limits are higher since you can contribute as both the employer and the employee.

How much does it cost to open a 401(k)?

Employees typically have no costs associated with opening a 401(k) and only nominal administrative fees and expense ratios from investments. 

If you’re self-employed with a solo 401(k), you’ll have to pay the costs that would typically be paid by the employer to the plan administrator.

TL;DR: How To Open a 401(k)

Most employers that offer a 401(k) will automatically enroll you in the plan. But you’ll still need to choose your contribution amount, whether it’s Roth or traditional, and select your investments.

Go for low-fee funds that won’t eat into your savings. Target date funds are the typical default and good for new investors.

Most importantly, don’t neglect your employer match. Read your paperwork to know what your employer will contribute, and max it out. This is free money that will help your retirement savings to grow that much faster. 

For more tips on managing your money, check out these episodes of the Erika Taught Me podcast:

• How To Invest for Beginners (Step by Step)
• You’ll Want to Fire Your Financial Advisor After Hearing This
• Investing Advice from the Most Powerful Woman on Wall Street

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