With the ever-shrinking number of defined benefit pension plans, saving for retirement has largely become the responsibility of the employee instead of the employer. In fact, many employers have switched over to a defined contribution plan, such as a 401k. For millions of people, a 401k is their primary retirement planning vehicle.
If you have a 401k plan, you likely have 401k questions that you should be able to ask your employer. If you’re not savvy about this type of account, find out 10 big 401k questions to ask 401k providers.
401k Questions to Ask Your Employer
Check out some information useful to an employee or the small business owner who is interested in starting a company retirement plan. Here are the important 401k questions to ask your employer:
1. Is a 401k Plan Only Available Through an Employer?
401k plans are offered through many employers as a way to attract and retain top talent when competing with other employers. Plans are offered more commonly by larger employers than small businesses because many small business owners believe that 401k plans are cost-prohibitive. But you can get into a 401k another way, according to Bill Nickles, principal and founder of YD Financial, and accredited investment fiduciary analyst. Nickles stated, “If you are a sole proprietor, there is a solo 401k that you could set up, but it does have to be attached to a registered business.”
2. How Complete Is the Investment Lineup?
A well-rounded investment lineup might include the following options:
- Money-market or stable-value fund: Conservative option that concentrates on principal protection
- Fixed-income fund: Consists of intermediate-term corporate and government bonds
- Large-cap equity fund: Broad-based fund that invests in large-cap companies
- Mid-cap equity fund: Invests in middle-sized companies with higher growth potential
- Small-cap equity fund: Focuses on small companies with high growth potential, but carries greater risks
- International equity fund: Invests in non-U.S. stocks
A well-diversified portfolio will consist of a mix of various types of equity and income funds because they each tend to perform differently depending on the market cycle.
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3. When Can I Enroll?
Many companies allow you to enroll in a 401k as soon as you start your job, although some employers might make you wait up to a year. Some companies automatically register you for a 401k, so be sure to ask about your 401k contribution limits so you will know the maximum amount you can save.
If you are not eligible to contribute to your employer’s plan, consider making a tax-deductible contribution to a traditional individual retirement plan or stowing away some retirement money in a Roth IRA. Ask your tax advisor if you are eligible and which choice might be best for you.
4. What Does It Mean to Say a 401k Cannot Discriminate?
According to the IRS, federal regulations ensure that 401k plan contributions made by and for ordinary employees are comparable to those made for highly compensated employees, such as managers or officers. Some differences in plan rules can exist from employer to employer, but once the rules are set, any exceptions or changes must apply to all full-time employees.
“A 401k is set up for the sole benefit of the participants of the plan,” Nickles said. “Therefore, if you are a full-time employee, you are eligible to participate and benefit from any company 401k. As with medical benefits, there may be a short time — three months for example — before you can participate, but all full-time employees are eligible. The company cannot pick and choose who participates,” he said.
5. Why Is a 401k Called a Defined Contribution Plan?
A 401k is called a defined contribution plan because employees make their own monetary contributions to the plan. According to Nickles, most plans available are defined contribution plans. “This places the onus of retirement savings almost entirely on the employee and not on the company or business,” he said.
Ilene Davis, a certified financial planner, believes it is important for employees to understand that the contributions they make are the amount “defined,” rather than the future benefit. She said employees need to know that the amount they will have in the future is not guaranteed as monthly income and is based on the contributions made and how the funds are invested.
6. What Does It Mean to Say 401k Contributions Are Tax-Deferred?
401k contributions are taken from an employee’s salary before the employee’s paycheck is issued. By participating in a 401k plan, the employee is opting to defer receiving the funds used for contributions until a later date, and, in turn, the taxes normally applied to the funds are also deferred. According to the IRS, the contributions are generally not taxed until they are distributed to the employee at retirement age or in the event of a loan or hardship withdrawal.
Tax-deferred contributions can be beneficial because you might be in a lower tax bracket as a retiree than when you were employed, which means that less tax will be applied to your 401k distributions.
7. How Much Can an Employee Contribute to a 401k Plan?
The IRS sets 401k contribution limits according to cost-of-living adjustments. Regarding 401k limits for 2017, an employee can contribute up to $18,000 to traditional and safe harbor 401k plans. If allowed by their particular 401k plan, participants who turn 50 before the end of the calendar year can also contribute an additional $6,000 to the plan, via catch-up contributions, for a total of $24,000 in elective deferrals.
Employer matching contributions do not count toward your contribution limits, but 401k contribution limits for 2017 state that combined employee and employer contributions cannot exceed the lesser of 100 percent of the employee’s salary or $54,000.
8. How Do I Track My Funds?
Ask your employer about financial planning tools and online statements that can help you assess the funds’ performance. You can measure performance in several ways.
Make sure to compare apples to apples. For instance, do not compare a growth-stock mutual fund’s yield to a U.S. Treasury bond fund’s yield — they do not fulfill the same role in your portfolio. Instead, measure a growth fund’s performance by using appropriate benchmarks, such as a market index that tracks growth stocks.
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9. How Do I Manage My Plan?
Managing your 401k requires some work. Although your employer takes care of your portfolio’s actual transactions, record-keeping and reporting, you must decide when and how to reallocate and rebalance your assets.
Read your summary plan description and the details — such as rules, fees and procedures — about your 401k. Ask your employer for a copy of your benefit statement, which you are entitled to at least once every 12 months. If you need something clarified, ask your employer to explain it in more detail.
10. How Good Is the 401k Matching?
There is no set amount that employers contribute to 401k plans, but it might be along the lines of 25 cents to 50 cents for every dollar you contribute, up to a set maximum of perhaps 3 percent to 6 percent of your salary. In other cases, there might be a dollar limit or no match at all. Any matching money increases your income but not your tax bill because you do not pay taxes on matching contributions until you withdraw them after retiring.
11. When Do I Become Vested?
Any money you contribute to your 401k is always 100 percent yours. Company-matching funds, however, typically vest at a specific rate, such as 25 percent a year or all at once after three or four years. Once you are fully vested, the entire company match is yours to take if you leave a job.
If you are not fully vested, you might be entitled to keep a portion of the match, or maybe none at all. Ask your employer about your 401k vesting schedule, as it can be a factor in determining when to give your notice once you decide to leave a job.
12. What Are My Investment Options?
Your 401k investment options likely will consist of mutual funds. Your employer can provide information about the available funds, but you will need to do the legwork and figure out which funds are best for your situation.
Because your 401k is a long-term investment, it is essential to choose the funds wisely. A general rule of thumb is to invest in products — such as stock-based mutual funds — that generate returns that historically have beaten inflation rates. Investing some of your contributions in bonds and cash can help balance the risk and volatility in the stock portion of your portfolio.
13. What Are the 401k Fees?
All 401k plans charge asset-based fees that impact your investment return and your long-term financial goals. These fees can be hard to calculate because you do not pay them directly — your plan subtracts them before your return is reported. Ask your employer about your plan’s fees, as the company should be able to give you a full explanation. You can also regularly review your account statement to find out how much you actually paid for various services.
14. When Can I Withdraw My Money?
You might be able to withdraw money from your 401k in the event of a financial emergency. Some plans permit loans, which you repay through payroll deductions. When you borrow from your plan, you sign an actual loan agreement. The IRS allows you to borrow either the lesser of $50,000 or half of your vested amount. The following hardships qualify for a 401k loan:
- Out-of-pocket medical expenses
- Down payment or repairs on a primary home
- College tuition and related educational expenses
- Threat of mortgage foreclosure or eviction
- Burial and funeral expenses
Your employer ultimately determines the criteria for a hardship withdrawal, however, so make sure you ask about it. Keep in mind that some companies prohibit contributions for at least six months after you take a withdrawal.
15. Are There Any Other Options?
If you feel your company’s 401k plan is not a good one, you might want to ask if there is a Roth 401k option. With a Roth 401k, you do not get a tax deduction up front. The money that goes into your account, however, can be withdrawn tax-free when you meet retirement age qualifications.
Don’t let the seemingly overwhelming task of sorting through 401k options stop you from participating in such a plan. Talk to your employer and ask questions so you can make an informed decision. It’s your employer’s duty to provide information on its 401k, but it’s your responsibility to ask for the information.
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