MARK RIEPE: I'm Mark Riepe. I head up the Schwab Center for Financial Research and this is Financial Decoder, an original podcast from Charles Schwab. It's a show about financial decision making and the cognitive and emotional biases that can cloud our judgment.
We're going to be talking today about 401(k)s. But first, here's an interesting, and trust me, a relevant tidbit about the natural world.
Most members of the animal kingdom are not monogamous. But there are a few that mate for life. Among them are Atlantic puffins, swans, coyotes, many penguins and gibbons, and the albatross.[1] Or is it albatrosses? I'm not actually sure.
Many of these are birds, and that's not a coincidence. Scientists believe part of the reason birds are so faithful is that their young grow and hatch from eggs. Because eggs are outside the mother bird's body, they are vulnerable to danger from predators and the environment. Males can help the females protect the eggs and care for the chicks.
It's similar to your nest egg. Your 401(k). You and your 401(k) are together for life. You're there for each other through thick and thin. And just like human couples, you and your 401(k) have different roles at different stages of life. There's a lifecycle of sorts for what happens with 401(k)s at four different stages of your work life.
The first is when you're new to the workforce. You're out of school and you're at your first job or maybe your first few jobs, and you're usually in your twenties. You start to save for retirement and it might be challenging to put aside money with an entry-level salary. But still important to put away something, especially if there's an employer match involved.
In the next stage you're the heart of the workforce. You've got some experience under your belt. You switch jobs. You have to decide what to do with the 401(k) from your old job. Whether you keep it where it is or roll it over. The third stage is when you're over 50. You can bulk up your retirement savings with catch-up contributions.
Finally, the fourth stage is retirement. You're out of the workforce and pulling money out of your retirement fund. It's March of 2026 when this episode airs, and at age 73 or 75 you must take required minimum distributions. You might say it's when your 401(k) takes care of you instead of you taking care of it.
I love a good origin story, so where did the 401(k) account come from? It was created with a provision in the Revenue Act of 1978 and went into effect in 1980.[2] A big change happened in 1981, though, when the IRS allowed employees to contribute to their 401(k)s through salary deductions. And the rest as they say is history.1
As of September 2025, 401(k)s hold more than ten trillion dollars in assets[3]. For a lot of people, it's the foundation of their retirement savings. 401(k)s are intended to make it easy to save for retirement and, given their ubiquity, they've succeeded. But there are a lot of details that matter. For example, contribution limits, catch-up contributions, tax issues upon withdrawals, different types of 401(k)s, and many others.
We're going to cover a lot of ground in today's interview. But no matter where you are in your work life, there's a good chance we'll address a topic that applies to your situation. And helping me do that is Lee McAdoo. Lee is a managing director at Schwab and she's Head of Schwab Retirement Plan Services. She's been in financial services since 2005 and with Schwab since 2021. She has her MBA from Columbia Business School. And she specializes in helping employers and employees with retirement planning.
Lee McAdoo, welcome to Financial Decoder.
LEE MCADOO: Thank you for having me. Glad to be here.
MARK: We are here to talk a little bit about 401(k) accounts and I think a good place to start maybe is how does the 401(k) fit within someone's broader financial plan and let's say what makes it unique compared to a savings account or a standard brokerage account?
LEE: Yeah, for sure. So retirement plans are really the primary savings vehicle for many Americans and people that are focused on their long-term goals. It's built for long-term savings. It has tax advantages. It leverages legal protection against situations like bankruptcy and legal action. And it also allows for consistent payroll deductions and automated deferral elections. So it's a very attractive vehicle and really the cornerstone of many long-term investing plans.
MARK: Yeah, I think the 401(k), the fact that you can contribute pre-tax dollars, that's just a huge advantage for the 401(k). But why don't we dive into that actually a little bit? What are the general differences between, say, a traditional 401(k) and a new variation that has popped up in the last several years, the Roth 401(k), when it comes to how and when an investor's money is taxed?
LEE: So Roth contributions are taxed immediately, while traditional 401(k) contributions are deferred until distribution. So the benefit of the Roth 401(k) is that any earnings that accumulate in the plan will be tax free when distributed after 59½ and it's been established for 5 years, while earnings on the traditional 401(k) will be taxed upon distribution at the individual's marginal tax rate.
MARK: Okay, let's talk a little bit about how much money can go into these because you can put as much money as you want into a standard brokerage account or savings account, but there are some limits on the amount of money that you can contribute to a 401(k) account. So what are the current 2026 limits. and those limits change, so how do they change over time?
LEE: So 2026 401(k) limits are $24,500 for anyone under 50. And if you're turning 50 during 2026, you get additional catch-up contributions. You can do about $8,000. So that would be $32,500 overall. So if you have income greater than $150,000 in 2025, you'll actually be required to make the catch up in Roth 401(k) beginning in 2026, which is new legislation. And your contribution limits are adjusted annually based on your cost of living.
MARK: And I think you also get… are there additional contributions if you get to the ages 60 to 63 over and above the $8,000?
LEE: Yeah, so those contributions are permitted to increase from $8,000 a year to $11,250.
MARK: One of the things that is great about a 401(k) is that many of the employers, they will sort of match some of the contributions that the employee is putting in. So how to, in practice, how does that generally work and what should participants be thinking about if they are contributing not enough really to get to that matching threshold?
LEE: So employer match is, as you said, referred to as free money because it's guaranteed. And in a lot of cases, it's immediate return on your investment in your 401(k). So 75 % of 401(k) plans that fund an employer match do it on a payroll basis, which allows the individual to realize that immediate return. And an employer match is generally structured to incent participants to save in their retirement account. And this represents that return of free money for the individual helps boost overall savings.
MARK: A lot of companies also use auto enrollment to kind of get people, to make it really super easy for people to get enrolled. So what kind of impact does that have on people's outcome? Generally, I guess generally speaking, do you think auto enrollment is a good idea or should people be left to do it on their own and do it themselves?
LEE: Well, that's really at the discretion of the plan sponsor who's the fiduciary on the plan. But in general, I can share that 401(k) participant participation rates have increased more than 10% over the last 10 years, which is phenomenal. And this increased plan participation is generally attributed to that higher adoption of auto enrollment. So auto enrollment, it's a process where plan sponsors will set a deferral rate. And then after a certain period, 30 days, if the participant hasn't taken their own action, the rates are raised. And so, you know, we see less than 10% of participants opting out of the default and moving to a lower level. And so that low opt-out rate has shown to have increased participation across really all industries offering plans.
MARK: Sometimes when people have studied, academics have studied 401(k) plans, they've noticed that investors, the employees, the participants, whatever you want to call them, are sometimes reluctant to make changes from whatever the defaults are when they enrolled in the account. And they call that kind of the status quo bias. How can people kind of fix that? How can plan sponsors make it easier for employees to get something that's more customized to what they're looking for?
LEE: Many individuals that are part of that default process become very passive regarding their 401(k) and will stick with whatever that default was within the plan. And so we really talk to our plan sponsors about an automatic savings increase program that helps offset this passive approach. Increases percentage is 1% up a year to a maximum level. And then plans that are using that automatic savings program are going to a minimum of 10% with many sponsors, and some even going as high as 15%. And so because individuals should be saving between 15% and 20% of their income, this helps them really get on track.
MARK: So the way that works, they may start out at 3 % and then the next year they'll start deferring 4 % and the next year 5 % and all that's done automatically. Is that how it works in practice?
LEE: Exactly.
MARK: Let's talk a little bit about that… You referenced, Lee, earlier, the 2026 contribution limits. Are there any situations where participants and employees are looking at those limits and thinking that, oh, that's my target. That's how much I should be saving for retirement.
LEE: Yeah, I mean those limits do become a psychological anchor and instead of hearing this is your maximum, people hear this is what I should be saving. And so the better anchor when we really do planning, which is what we advise for investors, is understanding your own retirement needs, when you want to retire, how long your money will last, and the life you want to fund. Maxing out can be great, but only if it fits your plan.
MARK: I want to go back to catch-up contributions that you mentioned earlier. Those are really powerful. Are they big enough that they can actually start changing someone's retirement timeline?
LEE: So in 2026, once you hit 50, you can contribute $8,000 on top of your standard 401(k) limit. And if you're between 60 and 63, there's an even larger super catch up that raises it to $35,750. And so catch ups don't really just increase how much you save. They can completely change your retirement timeline. For someone who started late, had career interruptions, those extra dollars can really boost your balances in the decades before retirement, when compounding and contribution size matter the most.
MARK: I'll get back to Lee in a moment. But right now I'm going to touch on what we love here at Financial Decoder, and that's psychological biases.
Lee covered the status quo bias, but there are a few others that can influence 401(k) investing. Namely, procrastination and present bias.
A few years ago, economists at Stanford University wondered if people avoided investing in a savings plan because they are procrastinators by nature, they lack financially literacy, or was it because of how retirement plans are structured.[4]
The structures they looked at were auto-enrollment and opt-in plans. As Lee pointed out, auto-enrollment plans mean you are signed up for the savings plan automatically. An opt-in plan is one where you have to take the initiative to sign up. It's not automatically done for you.
The researchers found that present bias played a bigger role under auto-enrollment plans. Present bias is the tendency to favor immediate rewards over future benefits. It's the opposite of saving for a rainy day. This study found that employees in an auto-enrollment plan were more likely to make lower contributions. They' were also less likely to hit the annual cap.6
In this study, it's likely that present bias prevented these employees from thinking about their future and adjusting their retirement savings accordingly.6 They took the path of least resistance and kept more money in their pocket today. On the other hand, financial literacy played a bigger role under an opt-in plan, where the employee has to make an effort to sign up. A financially literate employee in an opt-in plan is less likely to set it and forget it. They're also more likely to make higher contributions and to hit the annual cap.5
Since you're listening to this podcast, you're probably in the financially literate camp. Still, it's smart to be aware of the biases that can creep in and sway our decisions around 401(k)s. If you're at a new job and have been putting off signing up for a savings plan, you may be succumbing to procrastination bias, and it's not doing you any favors. Best to start putting aside money as soon as you can.
If you haven't signed up because your company's educational materials about employee benefit are confusing, you can always ask a financial advisor to clarify things, or your plan administrator, or the benefits team at your company to get more clarity.
To sum up, no matter why you're not signing up for a 401(k), it's a good idea to do so. Start that lifelong partnership as soon as you can. Now let's go back to my interview with Lee.
All right, I want to shift gears a little bit and because we've been talking about kind of getting the account set up, we've been talking about how much money to put in the account. Let's talk a little bit about how to invest what's in the account. In other words, what kind of securities to be held. So what kind of control do investors typically have when it comes to deciding how their 401(k) is invested?
LEE: There are usually a few core fund types. Target date funds are the simplest, so you pick a year and the fund automatically shifts from growth to less volatility over time. Index funds track broader markets but are low cost, really transparent. And then actively manage funds, they try to outperform the market but often come with higher fees, less predictability, and then you have bond or stable value funds there to reduce and preserve capital. Some plans also offer a self-directed brokerage account. That's the highest level of control and it lets you invest in a much wider range of ETFs, mutual funds, and individual stocks all inside your 401k.
MARK: A lot of people refer to 401(k)s as sort of a set it and forget it of account. I guess what do you see in practice? Do you see some risks of people checking their balance too often? And does that create any problems?
LEE: I think one of the most underrated strengths of a 401(k) is to set it and forget it. You're investing automatically every single paycheck with a long-term allocation and it doesn't need constant decision-making. So the structure is intentional, it helps remove emotion from the process. But as you point out, where people can get into trouble is checking too often. And when you look all the time, you start to be really concerned about volatility that may make you feel like you need to act on something and really with the long-term plan you may not.
MARK: Yep, I think that's right. Let's talk a little bit about the situation when someone changes jobs. I think I heard the statistic that the average person has something like 12 jobs over their lifetime. What factors should an investor think about when it comes to their 401(k) and they switch jobs? What are their choices and how do they make that decision about what they should do?
LEE: So you have a few different options. You can leave the money where it is. You can roll into your new employer's plan or you can roll into an IRA, which really offers the most investment choice. So there's no really one-size-fits-all. And the best choice is the one that has the least friction and keeps costs under wraps and helps you stay invested for the long term. In terms of a rollover, it's pretty straightforward. I mean, you request a direct rollover. The money moves right from your old plan into a new 401(k) or an IRA and that direct process avoids the taxes and the penalties and so make sure to make it direct and not make a checkout to you.
MARK: My guess is that even though a 401(k) is meant to be kind of, you know, sort of long-term money, it still makes sense to periodically check into it to see what's happening. So what's the risk if you don't do that and you just, you know, literally, to use your earlier phrase, you literally forget that you have it and you're just not paying any attention to it?
LEE: Yeah, if you go unmanaged for too long, we call that potential drift, and that can be problematic. And so you really end up taking more risk than you intended, or not enough risk, which can slow your growth. And so either way, you really need to match your portfolio allocation with your unique goals and your timeline. And so it's important to really periodically reset your portfolio and refocus on your goals.
MARK: And of course, I think many plans offer different investment options that'll do that for you, right? I mean, that's kind of what target date funds do.
LEE: Yeah, I mean there's lots of ways to accomplish that and most importantly is to have a clear picture of your goals and your plan and ensure that your 401(k) is allocated to accomplish that.
MARK: Just a few more questions, Lee, then I'll let you go. One of these is really about emergencies, financial emergencies that can happen to people and that they look at their, you know, something happens, they look at all this money sitting in their 401(k) account and there's a temptation to kind of pull that money out. What are some of the things that people should be thinking about before they go ahead and do that?
LEE: So the important thing to know is that any early withdrawal is going to trigger taxes and if you're under 59½ it's a 10% penalty on top of those taxes.
Really the big issue is that whatever you take out, you're only, know, a fraction of that is gone before it even gets to you. And the other issue that we talk about is just the opportunity cost. So the money that remains uninvested is not growing and you lose the magic of compound interest and that can really change your outcomes.
And so, on the other hand, there are situations where this makes sense. Some plans allow you to take a loan, which allows you to avoid taxes and penalties if you repay it, or hardship withdrawals, which waive the penalty but not the taxes. And in real emergencies, preventing eviction, covering critical medical care, that financial stability really may outweigh the long-term cost, which is, of course, always a personal decision and a personal calculation.
MARK: So it's an option, but maybe not the first option, given the consequences that you just laid out.
LEE: Right, proceed with caution, in a really critical situation, it may be your best course.
MARK: Probably another source of stress for 401(k) account holders is they may not have a kind of a financial emergency, but if they're invested in stocks the stock market does have volatility and they'll see their balance swinging around from day to day if they're if they're checking it too frequently how do how do long-term investors? How can they keep perspective during those types of periods?
LEE: The most important thing to remember is that the 401(k) plan is intended to be a long-term investment vehicle. And so really focusing on short-term market swings is not going to help you be a more successful long-term investor. And it's not really about short-term trading. All of that volatility, that tracking of the news could just be noise to your long-term goals and intended outcome.
MARK: All right, Lee, last question. Schwab Retirement Plan Services, administrating millions of accounts for investors across the United States. What is the most common habit or oversight that prevents investors from maximizing the potential of their 401(k)? In other words, if there's one piece of advice that you would give to people, "Don't do this, do this instead," what would that be?
LEE: Yeah, the biggest issue that we see with our plan sponsors and their participants is ensuring that people take action. you know, everyone is busy. They got a lot on their plate. They're busy at work. But really the most important part is get started, get invested, meet your match, do the basics.
The magic of compound interest is truly an incredible phenomenon. And the earlier you start and the more you're able to invest, the better off you are. So get started early and invest as much as you can.
MARK: Lee McAdoo is a managing director here at Schwab and she's the head of Schwab Retirement Plan Services. Lee, thanks for being here.
LEE: Thanks for having me.
MARK: Lee had some great tips and tactics to make the most of your 401(k), but here is one more piece of advice. If you open a 401k account don't forget that it exists. Believe it or not, it happens a lot. Many people forget. Especially if they change jobs often. A recent estimate found there are more than 29 million forgotten 401(k)s holding assets of more than $1.7 trillion.[5] If you never find your lost account, it can be converted to cash and even transferred to the state as unclaimed property.
But don't worry. The Department of Labor has a database that you can access. It can help you find a lost account using your Social Security Number. Armed with this information, you can contact the plan administrator. This can help even if the company you worked for no longer exists. Once you've found your lost funds, you'll have to decide if you want to roll them over into your current 401(k) or into an IRA, or an Individual Retirement Account.
There's a great article on Schwab.com/learn called "Tracking Down a Lost 401(k)." It has detailed information and links to helpful organizations. If you've lost track of an account, this is a must-read. You can find the link to the article in the show notes.
If you'd like to know more about, 401k accounts, Schwab has a lot of resources. Some of the most recent articles include: "Why a 401(k) Is a Smart Move"; "How the 401(k) Student Loan Match Works"; and a piece on the requirements and limits for catch-up contributions for 2026. And that's just the tip of the iceberg. Check the show notes for links to all kinds of 401(k) articles and videos.
If you'd like to hear more from me, you can follow me on my LinkedIn page or at X @MarkRiepe. That's M-A-R-K-R-I-E-P-E. As always, we'd appreciate it if you'd give us a rating or review on Apple Podcasts. Or comment on the show if you listen to us on Spotify. Or tell a friend about us. We always like new listeners, so if you know someone who might like the show, please tell them. They can follow us for free in their favorite podcasting app.
For important disclosures, see the show notes and schwab.com/Financial Decoder.
[1] Leoma Williams, "What animals mate for life? 10 most devoted loved-up couples in the animal kingdom," BBC Wildlife Magazine, February 14, 2026, https://www.discoverwildlife.com/animal-facts/animals-that-mate-for-life
[2] Kathleen Elk, "A brief history of the 401(k), which changed how Americans retire," cnbc.com, published January 4, 2017, updated January 5, 2017, https://www.cnbc.com/2017/01/04/a-brief-history-of-the-401k-which-changed-how-americans-retire.html
[3] "Release: Quarterly Retirement Market Data, Third Quarter 2025," Investment Company Institute, ici.org, January 15, 2026, https://www.ici.org/statistical-report/ret_25_q3
[4] Gopi Shah Goda et al, "Who is a Passive Saver Under Opt-In and Auto-Enrollment?", Working Paper 26078, July 2019, http://www.nber.org/papers/w26078
[5] Chris Kawashima, "Tracking Down a Lost 401(k)," schwab.com, August 28, 2025, Tracking Down a Lost 401(k) | Charles Schwab