Thinking About Your 401K Investments
A 401k plan allows a worker to save for retirement while deferring income taxes on the saved money and earning until withdrawal. There are hefty penalties and taxes one has to pay if they take money out of a 401k, for this reason most people do not do this unless it is very necessary or they are in a deep economic bind.
In a 401k the employee elects to have a portion of his or her wage paid directly, or “deferred”, into his or her 401K account. In participant-directed plans, which are the most common way, the employee can select from a number of investment options, usually an assortment of mutual funds that emphasize stocks, bonds, money market investments, or some mix of the above.
Many companies 401k plans also offer the option to purchase the company's stock. The employee can generally re-allocate money among these investment choices at any time. In the less common trustee-directed 401 plan, the employer appoints trustees who decide how the plan's assets will be invested. But for most cases it’s just a list of mutual funds that an employee has an option of choosing. They are either categorized as being a certain sector or industry. Also the choice can come with a level of risk involved. For example a sector like technology would be more risky and thus would be categorize as a high risk choice. Employees who like lots of risk would choose these and other investment options that are high risk.
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