401k Newbie Setup (now what?!?!)
 

So my wife got a new job with a huge promotion. She's 25 and we're setting up her 401k for the first time.

We've gotten to the point where we know we will go 6% to get the full company match (.50 to a dollar) but nothing more until we get more of a match (2 years).

We also know how we want to breakdown that 6% which is as follows:
20% Money market


15% international/Global equity


20-25% balanced/hybrid

Domestic equity breakdown
2% large value
2% large blend
6% large growth
3% mid value
3% mid blend
9% mid growth
1% small value
1% small blend
3% small growth

10% bonds


Now, I'm a total newbie to all of this and she has zero idea ha. I'm not even sure this small of amount is possible or if this is overkill in the breakdown on the 3%. This info came from a financial adviser at my bank whom I trust but again, I don't know a lot about this myself.

What we want to know now is, what do we do with these percentages? How do I select each item (are they all "mutual funds?") to take up that particular % listed above?

We have a printed list of a "monthly plan performance update" so I'm assuming this is what we'd use to make our selections.

I really appreciate the insight and welcome conflicting ideas as it will give us a good idea of multiple angles to take. I know very little about this but am determined to get a better understanding of the whole process.

Aside from that info above, how often should I update this for her? Twice a year? Once a month? 2 years from now when the company match increases?

THANK YOU!

Your wife should get a package from the group managing the 401K for her new company (wells fargo, ING, or whoever). That will include a list of what they offer (different companies offer different funds) and how those funds have performed historically. You will then fill out a form with what percentages you want invested in which specific funds. Every pay period that will be taken out of the check and invested based on your percentage breakdown. Companies handle their matching investment differently (some do it per pay period, but most I've seen do it either every 6 months or once a year) and sometimes the matching requires vesting periods before it all becomes "yours" so you control the investment of that money but it's tracked separately and if your wife leaves before the vesting period she will only get a percentage of that based on their vesting schedule.

You should get a statement every quarter on how your investments are performing. How often you want to update is up to you, I personally update yearly but then again most of my investments are not in a 401K. The breakdown of percentages recommended to you seems a little over the top to me at the beginning of a 401K. Assuming your wife is making $50K a year, 6% is $3K. 1% of that is $30 (assuming paycheck every 2 weeks) you are putting in a little more than $1 every pay check to some of those investments. I personally think that is taking diversification a little far, but that's just my opinion.

Thanks for the feedback, yeah I thought the same thing about over diversification.

Aside from setting things up ourselves, it seems there are Fidelity Freedom Fund options with different target dates.

Are these the sort of simplified ones you talked about?

And yes, the vested info I may have misspoken about:
She is 100% vested after 6 years. Now she is at 0% vested and after 2 years she'll have 20% vested.

I'm not sure when/if the 6% company match increases. I do know that that is the match right now and that they match .50 to the dollar.

20% in a money market fund seems awfully high for a 25 year old fwiw. I would guess the Fidelity Freedom Fund for a target retirement of around 2050 would have no more than 10% to fixed income as a whole, much less money market funds.

I don't think the target year retirement funds are a bad option. They can often diversify more efficiently (less fees) than you can on your own.

It's been recommended to me to increase my 401k contribution percentage each year when it comes time for my annual raise, anyway. I've done this for the 5 years I've worked at my company and found it to be the perfect time, as with the raise, it's it's not like I end up "missing" the money.
Edit to clarify: I don't up my contribution by the entire amount of my raise, but I up it by a little. That way, I still get a bigger paycheck but also contribute just a bit more.

I am also young (30 now) and have a somewhat risky portfolio...the thought being that if it tanks, I have time to make it back up. I'll do that for a bit longer then re-arrange it into safer options that earn less but are more stable.

/tk

That's a very smart idea - I actually do the same thing myself. I might be more conservative than most, but I generally try and put in half of my raise back into my 401K. Like Terp, I'm still young, so there will come a day when I can't do that any longer, as I'll already have maxed out, but I figure it's a good habit for now.

I think the Freedom Funds are the best option if you don't have a ton in the account right now (over 50k). Many funds have minimums of anywhere from $2500 to $10,000 which makes it hard to diversify with smaller amounts.

These are diversified depending on when you want to retire. It's not perfect (the fees are a little high), but the best option from what I've seen when starting out. I'm in the 2045 and she should probably be in that or the 2050 depending on when she wants to retire. The farther away retirement is, the more risk it will take. Usually that means more stocks vs bonds.

Agree on the 20% money market and 10% bonds for a 25 year old with a start-up account being way too high.

Another vote on Freedom Funds being good options for those without a lot of experience - you won't go badly wrong with those.

Also another vote for 20% being in money market for a 25-year-old being bad.

The money markets are making practically nothing right now. Literally .01% at Fidelity. Maybe down the line when they start making more, but it's literally like stuffing the money under your pillow.

Is this a Roth or Traditional? If it's a Roth, you should be more aggressive as every dime you make is tax free when you take it out at retirement.