Retirement means an end to financial earning. To secure your future financially, there are many investment and retirement plans which help you accumulate a part of your savings so that you have a secured financial future. One such retirement plan is the 401(k) plan.
401(k) is an employer-sponsored retirement investment and savings plan that works in the United States.
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In this article, you will get to know all about the 401(k) retirement plan and how it is helpful for NRIs.
A 401(k) plan, popularly known as an employer-sponsored retirement and investment plan named after a section of the United States Internal Revenue Code. It is a defined contribution plan, which means it is completely up to the will of the employee as to how much they are willing to contribute to their account, subject to annual limitations.
Contributions made by the employee are directly withdrawn from their 401(k) account and invested in the funds of their choice. Employees can invest the money saved in their 401(k) account in one or more mutual funds offered by the plan.
In general, there are 2 types of accounts under the 401(k) plan, mainly differentiated based on how they are being taxed.
Type 1 |
Type 2 |
Traditional account |
Roth account |
These are funded by pre-tax income |
These are funded by post-tax income |
A typical 401(k) plan offers a wide range of investments, but any single plan might or might not offer all possible types of investments.
Even though a 401(k) investment plan comes with a variety of options like:
Still, the one that rules the 401(k) investment opportunities is Mutual Funds.
Mutual funds are the most common 401(k) investment options. The most common Mutual Funds investment options include:
Mutual Funds |
Features |
Stock mutual funds |
May have specified themes, such as value stocks or dividend stocks |
Bond mutual funds |
May feature specific kinds of bonds, such as short-term or intermediate-term |
Target-date mutual funds |
Includes both, stocks and bonds. Allocation keeps shifting based on specific target date or based on your retirement plan |
Stable value mutual funds |
Investment is made in safe assets, such as medium-term or government bonds. Returns and principal are insured against loss. Beneficial for investors near retirement |
The abovementioned mutual funds range from conservative to aggressive, along with many grades in between. All the major financial companies use these similar terms while talking about the Mutual Fund range.
Let us look at the different range of fund types offered under 401(k) investments
Fund Types |
Features |
Conservative Funds |
Avoids risks |
Value Funds |
The fund is in the middle of the risk range |
Balanced Funds |
Funds include more risky equities |
Aggressive Growth Funds |
As the name suggests, funds include high risk-taking value |
Specialized Funds |
These are the funds investing in emerging markets, utilities, new technologies, or pharmaceuticals |
Target-Date Funds |
Includes both, stocks and bonds |
Instead of investing all your money in one particular fund, it is always considered better to allocate your money around different funds. Allocation of money in different funds increases the probability of better returns. However, it is up to you to decide where and when to invest.
Here are some of the key factors that should be considered before you invest in a 401(k) plan
It is important to differentiate between how much money you are willing to invest and take the risk upon. The sooner you start investing, the less you have to save to reach your goals later in life.
Diversification helps in capturing better returns in the end. Investing in mixed investments like stocks, bonds, commodities, and others, while maintaining balance is the best way to diversify your portfolio.
One should always plan to take risks suitable to their portfolio. Higher the risk, more chances of profits and losses equally.
More time until you need the money means you can take more risks and generate higher returns. This means that you should invest in such a way that you have ample time to recover if at loss.
You should avoid buying funds with high fees. It is always recommended that in case of options available, one should opt for the lowest cost option, which is an index fund.
To have a peaceful retirement or financial independence when you grow old, savings are very important. 401(k) investment is one option that can help you not just to save your money but also grow it over years.
The only thing to keep in mind while going for a 401(k) investment is to allocate your money wisely!
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