A 401(k) plan is a type of retirement plan long used by employers to attract employee talent. Pension funds, once in vogue, largely do not exist any longer. A good pension plan was a great thing for the employee because it guaranteed a monthly payment at retirement. But it was also very expensive for the employer.
401(k) plans have been adopted by most employers, while pension plans have been dropped by them. A 401(k) plan allows the employee to make before tax contributions to the plan and with investment options. With guaranteed monthly payments of a pension plan a thing of the past, it is very important that the employee to be active in their own retirement 401(k) planning.
The employee should be aware that the employer, for one, is not charging excessive fees, which are rampant within the retirement investment community. And the employee should also have broad investment options.
Some basic but important questions to ask about your 401k plan are:
1. Eligibility — When do you become eligible for the plan? Some plans make you wait up to a year. The best plans allow for immediate eligibility.
2. Employer Contribution – Does the employer make contributions to the plan and, if so, how much? Employers can make matching and non-matching contributions on behalf of employees, which contributions are usually a percentage of monies you contribute to the 401(k) plan in a given year.
3. Employer Matching Timing – When will the employer make matching contributions to your 401k plan? The sooner the better. The most generous employers make contributions each pay period, while the least typically make contributions at the end of the year.
4. Vesting Schedule – When do you get to keep employer contributions? Just because the employer makes contributions doesn’t mean to get to keep them. The best plans allow immediate vesting of employer contributions, the least generous allow vesting over a period of time, either 100% after 3 years of service or gradual vesting over a 2 to 6 year period.
5. Investment Options and Fees – Once funds are contributed to an employer plan, an important component is what your options are within the plan to invest your money. The very best plans offer a variety of index and actively managed funds available across different asset classes and with low expense ratios. The worst plans offer few investment options and with high fees.
It is best to AVOID insurance plans within a 401(k) plan as they typically offer the highest fees and lowest returns.
ROLLOVER OPTION – If you aren’t satisfied with the options or performance of your 401(k) plan, some employers will allow you to rollover some of your 401(k) plans to an IRA and managed by an outside investment advisor.
Or, if you are leaving a company through retirement or a job switch, you can also rollover over your 401(k) plan to an IRA upon departure.
Please feel free to contact me for a free consultation regarding the value of your current 401(k) plan and the possibility of doing a 401(k) IRA rollover.
James Morgan, CFP®, JD – 303-457-9500