You may have heard by now that Social Security will most likely not provide you with enough income to live comfortably -- especially given the potential for benefit cuts. That's why it's so important to save for retirement on your own. And if you have access to a 401(k) plan through your employer, the process of saving for your senior years becomes even easier.
The great thing about 401(k)s is that contributions are made via automatic payroll deductions. So you don't have to think about when to put money into your retirement plan -- it'll just happen.
But if you're going to save in a 401(k) plan, it's important to have a solid handle on your investments. Unfortunately, though, many savers don't.
A recent CNBC poll found that 46% of people with a 401(k) don't know what investments are in there. And that's problematic on multiple levels.
You need to be well-informed
Not knowing what investments are in your 401(k) poses two problems. First, not all 401(k) funds are set up to deliver the same returns. If you put your money into funds that are too conservative given your investment timeline, you might end up short on savings by the time your career comes to an end.
Target date funds, for example, have a tendency to err on the side of conservative investing. And while these funds are a good choice for people who want to take a "set it and forget it" approach to investing, putting all of your long-term savings into one might create a scenario where your 401(k) can't support the retirement lifestyle you're hoping for.
Then there's the issue of fees. The investments you choose for your 401(k) will dictate what sort of fees you're charged. And the more fees you pay, the more your savings get eroded.
Mutual funds, for example, are notorious for charging higher fees. And that does make sense to a degree, since they're run by actual people who are tasked with developing investment strategies.
However, you might enjoy a similar return in your 401(k) if you were to opt for index funds over mutual funds. Index funds are passively managed funds that track different benchmarks, and they tend to be a more cost-effective means of growing wealth.
Do some digging
The money you contribute to your 401(k) is money you can't spend on other things. So you probably want that money to go as far as possible. If that's your goal, spend a little time digging into the investment choices offered by your 401(k) -- and make sure to put your money into funds that are likely to help you meet your goals without going overboard on fees.
And if you have no idea how to invest your 401(k), see if your employer has any resources. They may be willing to bring in a financial planner to help guide you in those decisions. Similarly, it could be a smart idea to hire your own financial advisor and get their input so that you can make the most of your 401(k).