Choosing a 401(k) plan mostly comes down to four decisions: how much to contribute, whether to go traditional or Roth, which investments to select from your plan’s menu, and how to capture the full employer match. Most people encounter these choices during onboarding at a new job or during open enrollment, and the defaults your employer picks for you aren’t always the best fit. Here’s how to work through each decision.
Contribute Enough to Get the Full Match
Your employer match is free money added to your retirement account on top of your salary. Match formulas vary by company, but a common structure works like this: your employer contributes $1 for every $1 you put in, up to 3% of your salary, then 50 cents for every dollar on the next 2%. Under that formula, if you earn $70,000 and contribute 5% of your pay ($3,500), your employer adds $2,800. If you only contribute 3%, you leave $700 on the table every year.
Your first priority should be contributing at least enough to capture the full match. Check your plan documents or ask HR for the exact formula. Some employers match dollar for dollar up to a flat percentage; others use tiered structures like the one above. Whatever the formula, hitting the match threshold is the single highest-return move you can make with your 401(k).
Watch the Vesting Schedule
Not all employer match dollars are yours immediately. A vesting schedule determines how much of the match you actually keep if you leave the company. Some plans vest you fully after three years of service, meaning you forfeit the entire match if you leave before that. Others use a graded schedule, giving you 20% ownership per year so you’re fully vested after five years. Your own contributions are always 100% yours regardless of when you leave. If you’re considering a job change, check where you stand on the vesting timeline before giving notice.
Traditional or Roth: Pick Your Tax Timing
Most 401(k) plans let you choose between traditional (pre-tax) contributions and Roth (after-tax) contributions. The core tradeoff is when you pay income tax on that money.
With traditional contributions, your money goes in before taxes are taken out of your paycheck. That lowers your taxable income today. When you withdraw the money in retirement, you pay income tax on both the contributions and the earnings.
With Roth contributions, you pay tax now at your current rate. In exchange, qualified withdrawals in retirement (after age 59½ and at least five years after your first Roth contribution) come out completely tax-free, including all the investment growth.
Neither option has income limits inside a 401(k), unlike Roth IRAs. So even high earners can use Roth 401(k) contributions.
The decision hinges on whether you expect to be in a higher or lower tax bracket in retirement than you are today. If you’re early in your career and earning less than you likely will later, Roth contributions lock in today’s lower tax rate. If you’re in your peak earning years and expect your income to drop in retirement, traditional contributions give you a tax break now when it’s worth the most. Many people split contributions between both types to hedge their bets, giving themselves a mix of taxable and tax-free income in retirement.
How Much to Contribute Beyond the Match
For 2026, you can contribute up to $24,500 of your own salary to a 401(k). If you’re 50 or older, you can add a catch-up contribution of $8,000, bringing your personal limit to $32,500. Workers aged 60 through 63 get an even higher catch-up limit of $11,250, for a total of $35,750.
Maxing out isn’t realistic for everyone, and that’s fine. A common guideline is to save 10% to 15% of your gross income for retirement across all accounts. If you’re starting later, aim for the higher end of that range. If you’re in your twenties and just getting started, even 6% to 8% (including your match) puts you on solid footing thanks to decades of compounding ahead of you. The key is to increase your contribution rate by a percentage point or two each year, especially when you get a raise. Many plans offer an auto-escalation feature that does this for you.
Choosing Investments From Your Plan Menu
Your 401(k) plan gives you a fixed menu of investment options chosen by your employer. You can’t buy individual stocks or pick any fund you want. The menu typically includes some combination of target-date funds, index funds, actively managed funds, and a stable value or money market option. Here’s how to evaluate them.
Target-Date Funds
A target-date fund is designed around the year you plan to retire. If you expect to retire around 2055, you’d pick a “2055 Fund.” These funds start with a heavier allocation to stocks when retirement is far away, then automatically shift toward bonds and more conservative holdings as the target year approaches. They’re a solid choice if you want a hands-off approach and don’t want to rebalance your portfolio yourself. The downside is that target-date funds charge slightly higher fees than plain index funds because they’re managing that shifting allocation for you.
Index Funds
Index funds track a specific market benchmark, like the S&P 500 or a total U.S. stock market index, without a manager trying to pick winning stocks. Because there’s minimal management involved, index funds typically charge the lowest fees in your plan. If you’re comfortable building your own mix of stock and bond funds and rebalancing once or twice a year, assembling a portfolio from two or three index funds (a U.S. stock fund, an international stock fund, and a bond fund) can save you money on fees over decades. The tradeoff is that you need to adjust your stock-to-bond ratio yourself as you age.
Compare Expense Ratios
Every fund in your plan charges an expense ratio, which is an annual fee expressed as a percentage of your balance. A fund with a 0.03% expense ratio costs $3 per year for every $10,000 invested. A fund charging 0.75% costs $75 on that same balance. That difference compounds dramatically over 30 years. When two funds in your plan track similar investments, pick the one with the lower expense ratio. Your plan’s fund lineup should list expense ratios for each option, and they’re also available on the fund company’s website.
Check What Your Plan Charges You
Beyond the expense ratios on individual funds, some 401(k) plans charge administrative fees that come directly out of your account. These cover recordkeeping, compliance, and other plan management costs. Your employer may cover these fees entirely, split them with employees, or pass them through to participants. You can find these charges in your plan’s fee disclosure document, which your employer is required to provide at least once a year. If your plan’s all-in costs feel high, it’s still usually worth contributing enough to get the full match. The match return outweighs even steep fees.
Set It Up, Then Review Annually
Once you’ve picked your contribution rate, tax type, and investments, you don’t need to check your balance daily. But you should revisit your plan at least once a year, ideally during open enrollment. Confirm your contribution rate still aligns with your savings goals. Check that your investment mix hasn’t drifted far from your target allocation. If your plan added new, lower-cost fund options, consider switching. And every time you get a raise, bump your contribution percentage up before you adjust to the bigger paycheck.