There are many reasons people change their 401(k) contributions—for some it’s due to a salary increase, for others, a change in personal finances.
For a plan participant who wants to change their contribution, they can contact their company’s 401(k) plan provider to learn how to alter their contributions and how often they are allowed to do so (it can depend on the plan).
That said, experts agree that contributing to a retirement savings plan can be an important part of financial wellness.
There are many benefits associated with contributing to a 401(k) and there are steps all employees can take to prepare for retirement successfully. To understand how to maximize this investment opportunity, it’s important to start with the basics.
Purpose of a 401(k)
A 401(k) is a retirement account offered to employees that takes advantage of a qualified profit-sharing plan.
Employees may contribute a portion of their paycheck to the company’s 401(k) account, and employers can also contribute to each employee’s account.
The money a participant contributes to their 401(k) plan is also called an “elective salary deferral” and is not included in their taxable income. The plan distributions and earnings are taxed later on, once the participant draws from the account during retirement.
How to Change 401(k) Contributions
There may come a time when a plan participant needs to make changes to their 401(k) contributions.
In some cases, their budget may be tighter and they may want to lessen their contributions. Ideally though, they will be making changes to increase or max out their 401(k) contributions.
Some people might expect to be able to change 401(k) contributions any time they want. However, employers typically determine how often plan participants can make changes.
The plan provider will be able to advise participants on how often they can make changes to their contributions and what the process will look like. For employees unsure of the plan provider, the company’s human resource department can point them in the right direction.
Steps to Updating 401(k) Contributions
In some cases, participants can change their contributions directly through their plan provider’s website. Generally, the process of making changes to a 401(k) looks like this:
Step 1: A participant contacts their 401(k) provider to discuss how to change contributions for their particular 401(k) plan.
Step 2: The participant considers how much of their paycheck they want to contribute to their 401(k) moving forward, taking their company’s 401(k) match into consideration and contributing at least that much.
Step 3: The participant fills out any forms (online or paperwork) to confirm their new contribution.
Why Contribute to a 401(k)?
Contributing to a 401(k) plan is a great way to save for retirement. The funds in a 401(k) are invested, generally in a mutual fund, and the money an individual puts into the 401(k) can grow over the years and help the participant increase their retirement savings.
For many people, this type of investment is especially easy because you can choose how much of your salary to contribute each pay period, and deductions happen automatically.
Another benefit is the potential for savings during tax season. Since the contributions an employee makes to their 401(k) plan over the course of the year aren’t included in their taxable income, that can lower their overall amount of taxable income. This, in turn, may result in an individual falling into a lower tax bracket and paying less income tax in the present.
And in the future, when they might likely be in a lower tax bracket due to retirement, they’ll pay lower taxes when they draw on the money from their 401(k) account. (Note: Withdrawing money from a 401(k) account before retirement age may lead to early withdrawal penalties.)
Another perk of enrolling in a 401(k) plan is the notion of “free money” from one’s employer. Some companies match a portion of their employees’ contributions—often around 50 cents to $1 for each dollar that an employee contributes.
Typically, an employer might set a maximum matching limit, such as 3% to 6% of the employee’s salary.
This matching contribution is often referred to as free money because the contribution effectively increases an employee’s income without increasing their current tax bill. It’s worth noting that an employer’s match generally vests over the course of three or four years—meaning that the employer-contributed money will accrue in the account, but an employee won’t be able to keep it if they switch jobs, unless they remain with the company for that set period of time.
Setting up Recurring Contributions
When it comes to setting up a 401(k), the process varies by workplace. Some companies offer automatic enrollment to employees, automatically reducing the employee’s wages by a certain amount and diverting that money to the employee’s 401(k) plan, unless the employee chooses not to have their wages contributed.
Or, an employee can choose to enroll, but to contribute a custom amount. This type of contribution is referred to as an elective deferral.
In companies that don’t offer automatic enrollment as an option, employees will need to work with their HR department and retirement plan provider to get their 401(k) set up.
Participants need to decide how much they want to contribute, may need to choose their investments, can opt to take advantage of autopilot settings, and can roll over a 401(k) from a past job into their new one.
How Much to Save for Retirement
The Department of Labor (DOL) outlined a few best practices for investing in order to save for retirement.
It’s estimated that most Americans will need 70% to 90% of their preretirement income saved by retirement, in order to maintain their current standard of living. Doing that math can give plan participants an idea of how much they should be contributing to their 401(k).
Participants might also consider a few basic investment principles, such as diversifying retirement investments to reduce risk and improve return. These investment choices may evolve overtime depending on someone’s age, goals, and financial situation.
The DOL recommends that employees contribute all they can to their employer-sponsored 401(k) plan to take advantage of benefits like lower taxes, company contributions, and tax deferrals.
Adding Alternative Investments to a 401(k)
Some savers may find themselves interested in pursuing alternative investments when saving for retirement. An alternative investment takes place outside of the traditional markets of stocks, fixed-income, and cash. This method may appeal to those looking for portfolio diversification. Popular examples of alternative investments are private equity, venture capital, hedge funds, real estate, and commodities.
Self-directed 401(k)s allow participants to add alternate investments to their 401(k) portfolio. With a self-directed 401(k), the investor chooses a custodian such as a brokerage or investment firm to hold the amount of assets and execute the purchase or sale of investments on the participant’s behalf. If an employer offers a self-directed 401(k), the custodian will likely be the plan administrator.
For employees looking to change 401(k) contributions, the process is often as simple as reaching out to your plan provider and confirming that you’re allowed to make a change at this time.
Some companies have rules around when and how often employees can make changes to their contributions. Once you have the go-ahead to make the change, and have considered what works best for your current financial situation and your future goals, it’s generally straightforward.
A company-sponsored 401(k) plan offers many benefits—including the “free money” that comes with an employer-matching program (as long as you stay at the company until you’re fully vested).
But there are also other ways to save for retirement. For those looking to invest in their futures in a different way, SoFi Invest® offers options.
Investors can get started with as little as $1 and can trade stocks and ETFs for free.
Flexibility is key, which is why SoFi invests allows users to choose their stocks, ETFs, and crypto. And for those who want more guidance, SoFi can build them a portfolio with automated investing.
The information provided is not meant to provide investment or financial advice. Investment decisions should be based on an individual’s specific financial needs, goals and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . The umbrella term “SoFi Invest” refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
Third Party Brand Mentions: No brands or products mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third party trademarks referenced herein are property of their respective owners.
The Automated Investing platform is owned by SoFi Wealth LLC, an SEC Registered Investment Advisor (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA / SIPC , (“SoFi Securities”).
The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above, please visit http://www.sofi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer to sell, solicitation to buy or a pre-qualification of any loan product offered by SoFi Lending Corp and/or its affiliates.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Crypto: Bitcoin and other cryptocurrencies aren’t endorsed or guaranteed by any government, are volatile, and involve a high degree of risk. Consumer protection and securities laws don’t regulate cryptocurrencies to the same degree as traditional brokerage and investment products. Research and knowledge are essential prerequisites before engaging with any cryptocurrency. US regulators, including FINRA , the SEC , and the CFPB , have issued public advisories concerning digital asset risk. Cryptocurrency purchases should not be made with funds drawn from financial products including student loans, personal loans, mortgage refinancing, savings, retirement funds or traditional investments.
Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.
External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
If you invest in Exchange Traded Funds (ETFs) through SoFi Invest (either by buying them yourself or via investing in SoFi Invest’s automated investments, formerly SoFi Wealth), these funds will have their own management fees. These fees are not paid directly by you, but rather by the fund itself. these fees do reduce the fund’s returns.. Check out each fund’s prospectus for details. SoFi Invest does not receive sales commissions, 12b-1 fees, or other fees from ETFs for investing such funds on behalf of advisory clients, though if SoFi Invest creates its own funds, it could earn management fees there.