When American workers put a portion of their monthly salary into their 401k retirement plans, the money in that fund is then invested in stocks, bonds, money market funds, or some combination of the above. You can also choose to take your compensation in the form of your company’s stock.
Most people manage their 401k plans themselves, in what’s known as a participant-directed plan. That means that even though you can’t spend the money in your 401k, you can choose to put it towards any investment vehicle you like, whether it’s stocks, bonds, money market instruments or your company’s own stock. Other people have trustee-directed plans, which means that they delegate the actual investment of their 401k plans to managers who will do it for them.
The investments that you make with your 401k fund will rise and fall with the overall financial picture. If the stock market is booming, your 401k fund will boom too. If the market isn’t doing so well, you’ll see your 401k numbers fall along with it. It probably makes sense, therefore, to spread your investments around so that they’re not all in one place, should that type of investment run into trouble. One well-known example is the Enron Corporation. Many employees took company stock as their 401k compensation, only to lose everything when the company went bankrupt as a result of shocking management corruption.
Planning for your retirement makes sense at any time. Even though you can’t spend any of the money in your 401k until you retire, still, it’s good to know that it’s available.
Before you start your 401k plan, be sure to consult with a financial adviser to get the best advice.