10 Big 401k Questions to Ask Your Employer

401k questions

With the ever-shrinking number of defined-benefit pension plans, saving for retirement has largely become the employee’s responsibility instead of the employer’s. In fact, many employers have switched over to defined contribution plans, such as the 401k. And for many people, a 401k is their primary retirement savings vehicle.

If you have a 401k plan, it’s important that you understand how it works and — perhaps most importantly — how much it’s costing you. Here are 10 big 401k questions you should ask your employer:

1. How complete is the investment lineup?

A good 401k plan should have a solid, complete investment lineup. Christine Benz, director of personal finance for investment research and management firm Morningstar, said you should ask:

“Does [my] plan offer the basic portfolio building blocks for workers at various life stages, including well-diversified U.S. stock, foreign stock and core bond funds, as well as target-date funds for investors who don’t want to handle asset allocation? Does it offer index funds for people seeking ultra-low-cost options?”

In addition to asking questions about your 401k investment lineup, “you should also assess the quality of the offerings: their fees, their managers’ experience level and their past risk/reward profile, to name a few of the key factors,” said Benz, who added that Morningstar.com is a good resource when researching your 401k’s investment lineup.

2. How were the plan investment choices chosen?

Essentially, you want to find out what process your company used to choose the investments that are offered in your 401k plan. A plan that employs a sound investment process is more likely to offer a menu of sound investment choices. So, does your company have a process to select the asset classes, specific mutual funds or other investment vehicles available to you?

Your company’s process should include specific criteria such as relative performance compared with the fund’s peers, low relative expenses and minimum manager tenure. This is the essence of a responsible process for fund selection.

3. How was the 401k plan provider chosen?

Perhaps your plan’s provider is Fidelity, a brokerage firm. Or, perhaps it’s an unbundled arrangement with a separate investment custodian, investment advisor and a third-party administrator. If so, how did your company decide on these vendors? And, how does your company monitor their performance?

It’s the plan sponsor’s responsibility to ensure that all plan vendors are doing a solid job and that their costs are reasonable. Also, there should be a process in place to select and monitor plan service providers. A company that chooses a 401k plan provider just because the plan is offered by the company owner’s brother-in-law or golfing buddy might not have your best interests in mind.

Read: 5 Signs of a Sub-Par 401k

4. Are there any conflicts of interest?

Ideally, all of the service providers used and the investments offered in your 401k plan should have been chosen on their merits instead of some conflict of interest. But, there’s a chance that might not be the case.

For example, a lawsuit brought by current and former employees of Ameriprise Financial alleged that the company offered its own high-cost, proprietary mutual funds as investment options in the company’s 401k plan, reports Zacks.com.

In a smaller company plan, it might be that the owner’s golfing buddy or his brother-in-law is the agent or registered rep on the plan, which might be offered by an insurance company or brokerage firm. This is rarely a good arrangement for anyone but the person who sold the plan.

5. Who decides when it’s time to remove an investment choice?

If you have a 401k, you need to know how the plan is managed and how decisions about the investments are made. You’ll also want to find out if someone with expertise is helping make those decisions.

Here are some follow-up questions you should ask your employer:

  • Is there a regular process in place where the plan sponsor monitors the investments’ performance?
  • Do they use an outside investment consultant?
  • Are their criteria in place to determine when an investment is placed on a watch list or considered for termination and replacement?

6. How good is the 401k match?

According to Benz, “The no-brainer move for anyone with a 401k plan is to contribute at least enough to take advantage of any matching funds your employer is kicking in.” If you don’t get the full match, you’re basically throwing away free money you could’ve used in retirement.

“The most common matching setup, according to the Plan Sponsor Council of America, is a 50 cent [on the dollar] match on employee contributions of up to 6 percent of pay,” said Benz. “To determine whether to invest more than you need to earn matching contributions, do a little research on the costs and quality of the investment options. If the plan looks subpar, you may want to steer additional retirement assets to an IRA before maxing out your company retirement plan contributions.”

7. How much am I paying in administrative fees?

The last thing you want is to be overpaying in 401k fees, especially administrative fees. “Expense ratios of more than 1 percent are a signal that your plan is a costly one,” said Benz. “To find out if you’re paying additional administrative expenses on top of what the funds charge, seek out your plan’s annual report (Form 5500). You may see your plan’s administrative expenses expressed as a dollar amount.”

She continued, “You’ll then need to divide that dollar amount by the total assets in the plan to arrive at a percentage. There aren’t hard-and-fast cutoffs about what constitutes a high-cost plan, but if your plan’s administrative costs edge above 0.50 percent — and certainly if they’re more than 1 percent — that’s a red flag that you have a high-cost plan.”

High investment expenses serve as a drag on your returns. If other plan costs, such as administrative fees, are being paid from your account as well, this really can put a crimp in your ability to accumulate the type of retirement nest egg that you will need for a comfortable retirement.

8. Does the 401k plan engage in revenue sharing?

Revenue sharing is an arrangement where mutual fund companies make payments to 401k plan providers to have their fund included in the platform.

Christopher Carosa, author of the book “Hey! What’s My Number? How to Improve the Odds You Will Retire in Comfort” and chief contributor of the site FiduciaryNews.com, said you should ask your employer if the funds that you’re interested in contain revenue-sharing payments, 12b-1 fees or other fund-specific fees. While these fees don’t increase a fund’s expenses directly, it’s believed that mutual fund companies will take these costs into account when creating their expense ratios.

Carosa also suggested that you should ask how these revenue-sharing dollars are used. Are they credited back to your account specifically based upon your investment in a particular fund that includes revenue sharing? Or, do they go into a general pool that in effect subsidizes other plan participants?

9. I don’t want to make my own investment choice — can I still invest in a 401k?

Often, the default investment alternative (DIA) for those who don’t want to make an affirmative election is a target-date fund. With a target-date fund, your fund’s manager will rebalance your assets each year so that by the specific year you retire, your retirement goal is reached. Meanwhile, as you get closer to retirement, your target-date fund will automatically adjust to lower your risk level.

Carosa stressed that target-date funds are not the only type of managed fund that can be offered in a 401k plan. You should ask if there are target-risk funds available, as well. These funds are more static in their asset allocation and are managed based on your risk level instead of your target retirement date.

10. Does the plan’s website offer online tools?

Many plan websites offer investment and retirement planning tools for participants who need help investing and planning for retirement. Carosa uses a retirement planning calculator from his book as an example. Retirement savings tools and calculators can help you manage your investments, so take advantage of them when they’re offered.

Keep Reading: How to Get Rich Without Getting a Raise

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