Three Things Your 401(k) Needs From You

A 401(k) is one of the best tools available for building retirement wealth.

1. Pre-tax contributions.
2. Tax-deferred growth.
3. An employer match in many cases.

Those are advantages you simply cannot replicate anywhere else.

But none of that matters if you are not enrolled. After years of talking with clients and prospects about their retirement accounts, I have concluded that making the most of your 401(k) comes down to the same three things. Not complicated things. Just three things, done consistently, over time.

First: Enroll and Max Out Your Contributions

This sounds obvious, but it’s not as common as it should be.

Many people enroll in their employer’s plan but contribute only enough to capture the match, or whatever percentage felt comfortable at the time. That is a reasonable starting point. It is a poor ending point.

The goal is to contribute the maximum the plan allows.

2026 401(k) limits:

• Under age 50: You can contribute up to $24,500 to a traditional and/or Roth 401(k) in total.
• Age 50 and older: You can contribute the regular $24,500 plus an $8,000 catch‑up, for a total of $32,500.
• Ages 60–63: There is a special “super catch‑up” that lets you contribute up to $35,750 total in 2026, depending on how your plan implements SECURE 2.0.

Those limits exist for a reason: the government is telling you how much you are allowed to shelter from taxes in a single year. Use it.

I understand that maxing out is not easy, particularly early in a career when paychecks feel thin. But there are practical ways to work toward it:

• Budget around necessities first, then conveniences, then luxuries. You may find that some of what felt necessary is optional, and that the 401(k) account growing in its place starts to feel better than what you gave up.
• When you receive a raise, a bonus, or pay off a recurring bill, redirect at least half of that amount into your 401(k) contribution rate. You were living without it; let it go to work instead.
• If you are early in your career and genuinely stretched, think about whether family members might help bridge the gap. Prior generations helping younger ones build retirement savings is not unusual, and the compounding that results is meaningful.

The beautiful thing about a 401(k) is that the money is invested before you see it. You adjust to the take-home pay you have. The discipline is built into the structure. Take advantage of that.

Second: Keep It in Equities

Once you are enrolled and contributing, the next question is where the money goes inside the plan. This is where a lot of 401(k)s go sideways.

Most employer plans offer a limited menu of investment options: various mutual funds, and often a collection of target-date retirement funds. Target-date funds are worth understanding, because they are widely used and (in our view) poorly suited to most investors.

A target-date fund is designed to shift your allocation automatically as you approach a projected retirement year, moving money out of stocks and into bonds over time. The idea is that this makes your portfolio more conservative as you get older. The problem is that the fund makes this decision with almost no information about you specifically. It does not know what other assets you have, what income you will have in retirement, or whether the bond market is a good place to be at any given time.

As a general principle, any money with an investment horizon longer than three to five years is equity money. Stocks have historically been the best available vehicle for long-term wealth building, and that does not change because a calendar says you are getting closer to retirement.

When choosing among the equity options in your plan, look for diversification across market segments rather than concentrating in a single index. An S&P 500 index fund, for example, has become heavily weighted toward large-cap technology companies. It may feel diversified, but it is not behaving like one. A mix across large-cap value, mid-cap value, and small-cap value funds, reviewed and rebalanced once a year or so, is a reasonable approach for most people.

The specifics depend on what your plan offers. But the principle holds: stay in equities, understand what you own, and do not let a target date make decisions that should account for your whole financial picture.

Third: Review It Once a Year — No More, No Less

Here is the right amount of attention to pay to your 401(k): once a year.

Check your contribution level. Confirm you are still invested in equities. Rebalance if one fund has significantly outperformed the others. Then close the statement and go on with your life.

The 401(k) is not meant to be managed like a trading account. The whole point is that it grows steadily, out of sight, over a long period of time. Checking it too frequently leads to reactions that do not serve long-term investors. Once a year is enough.

What About the Investment Options Themselves?

The one legitimate frustration with 401(k) accounts is that you are limited to whatever your employer’s plan offers. If those options are poor, or if you would simply rather have your retirement savings managed with the same attention as the rest of your portfolio, there is now a way to do that.

We are able to work directly within clients’ 401(k) accounts, in coordination with the rest of what we manage for them, without requiring a rollover or any disruption to the plan itself. If you have wondered whether we could bring the same approach to your employer-sponsored account that we bring to your other investments, the answer is: we can. Give us a call and we will start with a review of what you have.

One More Situation: Leaving a Job

If you are changing employers and have a 401(k) with your former company, the usual recommendation is to roll it over into a self-directed IRA. A direct rollover to an IRA (meaning the funds transfer directly to the new account without passing through your hands) carries no tax consequences and no penalties.

The reason to move it is straightforward: once you leave, the 401(k) stays connected to your former employer’s plan administrator and HR systems. That is an unnecessary layer of complexity. A rollover IRA gives you the same investment options, often more, and is easier to coordinate with the rest of your financial picture. If you want to work with an advisor, it is also easier to bring under management.

The mechanics are simple. The hardest part is usually remembering to do it.

The Short Version

1. Enroll and max out your contributions.
2. Stay in equities.
3. Review it once a year.

If you change jobs, roll it over.

None of this is complicated. The challenge is doing it consistently, for a long time, without letting short-term noise interrupt a long-term plan. That is what a 401(k) is designed to support. Let it do its job.

The opinions expressed are those of Anthony Muhlenkamp and are not intended to forecast future events, guarantee future results, or offer investment advice.