The First-Time 401(k) Saver's Guide

The Class of 2015 is trading in its caps and gowns for suits and ties, and a wave of college grads are hitting the workforce. This also means a new crop of workers will begin saving in a 401(k) for the very first time. Even though retirement might seem like a lifetime away for most 20-somethings, the earlier you start saving, the easier the path to retirement can be.

Embarking on a new savings plan can be daunting, so I've put together a guide to help you navigate your first 401(k) and understand how it can help you maximize your retirement savings:

1) Enroll ASAP. Enrollment eligibility and timing will vary depending on where you work. Some companies will allow you to enroll on your first day, while others will only let you sign up for the 401(k) plan after you have been there for six months or a year, for example. Whatever the case, I'd recommend enrolling as soon as you are allowed. Thanks to the power of compounding, the sooner you start saving, the more money you can have in your account in retirement.

2) Sometimes your employer will take action on your behalf. Some 401(k) plans utilize what's called auto-enrollment, which means that 401(k) contributions will automatically be withdrawn from your paycheck as soon as you are eligible. This is one way your new employer may be looking out for your financial future. It's important to know if your company's plan employs this feature, because if not, you want to ensure you're proactively signing up as soon as you can.

3) Make the most of your match. You'll want to highlight this one. One of the biggest advantages of saving in a 401(k) is that many companies offer a matching contribution in some form. For example, it might be a match of 50 cents for every dollar you contribute, up to six percent of your salary. If your employer does offer a match, I strongly encourage you to contribute enough to take advantage of it in full. The match is like an automatic return on your investment that you can't get anywhere else. In fact, I always say this should be your number one financial priority, even before paying down debt.

Just keep in mind that receiving an employer match can sometimes be dependent on your length of service, which is commonly referred to as "vesting." Your employer will be able to tell you the specifics of your plan.

4) 401(k) plans will likely offer several investment options. Typically, your 401(k) menu will consist of a wide selection of funds across several asset classes, such as large-cap stocks, international stocks and bonds. When choosing from among these options, keep in mind how much risk you're comfortable taking on, which tends to correspond with the amount of time you'll be in the workforce. Generally speaking, as a younger worker, you'll want to allocate most of your portfolio to stocks, and over time, gradually move the balance towards more conservative bond and other fixed income investments.

5) Low-cost options may be available. I highly encourage you to check for any low-cost investment options, like index mutual funds and exchange-traded funds, that may be a part of your plan's lineup. These kinds of funds have lower operating expenses, so investing in them can mean putting less of your savings towards management fees and putting more into your account.

6) Professional advice is often available. Setting up and continuing to manage a 401(k) can be tricky for workers of all ages, but it's an especially tall order for those who are brand new to the process. Fortunately, many 401(k) plans offer some form of third-party, professional financial advice. If your plan includes these managed services, you'd be wise to take advantage of them. Our data shows that people who took advantage of independent, professional 401(k) advice tended to increase their savings rate, were better diversified and stayed the course in their investing decisions.* All of that can go a long way towards beefing up your account balance.

7) 401(k)s offer tax planning opportunities. If you're new to 401(k) planning, you may not realize that traditional 401(k) plans can help lower your annual tax bill because you make your contributions with pre-tax money. Some companies also offer what's called a Roth 401(k), which offers a different kind of strategic tax planning opportunity. A Roth 401(k) is funded with after-tax money, which means the money you withdraw from your account in retirement is then tax-free after you meet certain requirements. This is an option that makes sense for a lot of young workers, who anticipate retiring in a higher tax bracket than when they began their careers.

If you still have questions about your new 401(k) plan, you can take advantage of the myriad online resources available. Armed with all of this knowledge, you'll be well on your way to starting a retirement savings plan that will help you have the lifestyle you want when you eventually "graduate" from your career.

*In-depth behavior analysis of point-in-time advice provided through 401(k) plans serviced by Schwab Retirement Plan Services, Inc., 2010. Retirement plan investment advice is formulated and provided by GuidedChoice Asset Management, Inc. (GuidedChoice®), which is not affiliated with or an agent of Charles Schwab & Co., Inc., Schwab Retirement Plan Services, Inc. (Schwab), or any of their affiliates.

For general informational purposes only.

This information is not intended to be a substitute for specific individualized tax, legal, or investment planning advice. Where specific advice is necessary or appropriate, you should consult with a qualified tax advisor, CPA, Financial Planner or Investment Manager.

Schwab Retirement Plan Services, Inc. provides record-keeping and related services with respect to retirement plans and has provided this communication to you as part of the record-keeping services it provides to the Plan.

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