Confused about your 401(k) plan at work?
Don't know what you don't know?
The majority of Americans have access to a 401(k) plan at work. In this article, I'm going to clue you in on a few things you need to know.
So here is what you may not know, that you need to know.
1. What are the investment options? Most plans have a menu of at least 10 or more investment options. Sometimes they can have 40 or more included stable value investments. Find out which choices are most appropriate for your age and risk tolerance. You can do this by either talking to the advisor on the plan, or going online to the 401(k) and selecting investment options. Look for a risk questionnaire or some kind of risk walk through to assess what to own. In addition to the allocation information, there should be links to each investment's prospectus, fees and performance.
2. How much am I paying in fees? Your fees or the investment's expense ratio are usually found in the prospectus. There should be a link to this on your 401(k) web site. There also can be fees for record keeping and administration passed on to you by your employer. You can get this information by a simple request. It also has to be disclosed annually in your employers 408(b)2.
3. Is there a match? It's important to at least contribute enough to get your employer's match. It's free money! Why wouldn't you want all of it? A common match is 50% of the first percentage. So if your employer matches 50% of the first 6% you contribute with a salary of $70,000, then you kick in $4,200 and the match is another $2,100! Naturally you will want to save far more than just the match.
4. When am I vested? Vesting schedules are time periods that have to elapse before you are entitled to the company match portion. Of course your contributions are always yours and 100% vested. Common schedules can be over 3-6 years. Cliff vesting can be 0% for two years and then 100% after three years. The most common vesting schedule will be 0%, 20%, 40%, 60%, 80% then 100% after 6 years. Know where you are in this schedule and when the money gets applied, before you change jobs.
5. When can I withdraw my money? With a 401(k) you cannot withdraw before 59 1/2 without a 10% penalty. Some plans will not let you withdraw unless there is a hardship, death, disability or separation from service. You have to take some of your money out for minimum distributions when you turn 70 1/2. Some plans offer loans. I hate 401(k) loans. You can borrow up to 50% of your balance, but it has to be paid back in full within 5 years. God forbid, you change employers or get fired before the payback. That's considered a distribution and is taxable.
Ultimately, you have to educate yourself about your plan. Attend the 401(k) meetings your employer offers. Check out brochures and webinars as well. If the information is still confusing, check with your human resources contact or the financial advisor that covers your plan. Don't wait to sign up because you're confused, go get educated! Procrastination is the enemy of a successful retirement.
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