8 Questions to Ask About Your Company’s 401(k) Plan

Currently, 80% of the United States workers have access to a 401(k) plan. If you have a new employer that offers a retirement account, it is important to research the available plans. Each company plan is unique, so it is essential to ask about your companies’ options because it is your money on the line. Because of that, here are the eight questions you should ask about your company’s 401(k) plan.

  1. Does the company match my contributions?

The most critical question you can ask is if your company will match your 401(k) contributions. 401(k) matching can make huge increases to the amount of money you acquire in your retirement account. When your employer matches your contribution, it is essentially FREE MONEY. (What is not to love about that?) Depending on what your company matches, it could double the amount of money you’re already saving.

Employers typically match a percentage of your contribution. For example, if you make $75,000 a year and contribute 5% of your salary ($3,750), and your company matches 50% of your contribution, this adds $1,875.

  1. When am I eligible to enroll in my 401(k) plan?

Some companies require you to work for a specific time before you are eligible to enroll in their 401(k) plan. Asking this question of eligibility from the start helps to ensure that you are prepared to enroll when it is made available to you. We can guarantee that your companies 401(k) representative will not track you down when it is time to enroll, so it is important to not only find out the date, but to mark your calendar so you are ready.

If you have a waiting period, at Trust Company of Oklahoma, we suggest opening an Individual Retirement Account (IRA) and saving on your own while waiting.

  1. What are my investment options?

Most company based 401(k) plans allow you to choose from different options such as investments, mutual funds, stocks, and bonds. Many companies use target-date funds as their default option, with auto-enrolling ability along with that. According to Marketwatch, 70% of US companies automatically enroll their employees into these funds. This is why it is incredibly important to ask questions about your companies 401(k) plan.

Make sure you find out if you can switch your plan to a different investment option should a need for that arrive. After all, life changes, and the market changes as well. At Trust Company of Oklahoma, we suggest rebalancing your account allocations quarterly so you do not miss out on your hard-earned retirement savings.

  1. What does it mean to say a 401(k) cannot discriminate?

The IRS has federal regulations in place in order to ensure that 401(k) plan contributions made by ordinary employees are comparable to those made for highly compensated employees, such as managers. Though an organization can change some rules, the IRS says that the rules shall apply to all full-time employees. This guarantees you will have the same retirement privileges that everyone else has, no matter their title or position within the company.

  1. Which investment option has the lowest expense ratio?

One way to maximize your returns is to keep your investment cost relatively low. Many investment options charge shareholders expense ratios. This expense ratio funds are generally used for administrative and operating expenses such as compliance, distribution, management, marketing, shareholder services, and record-keeping fees. This expense ratio reduces your investment return in the long run, so it is important  to pay attention to how much this ratio may be. Your plan provider should easily be able to provide you with an expense ratio for each plan option you have available to you.

  1. Why is a 401(k) called a defined contribution plan?

A 401(k) is called a defined contribution plan because employees make their own monetary contributions to the plan. It is important to understand that the contributions you make are “defined” rather than a future benefit. You must understand that the amount you have in the future is not guaranteed as monthly income and is based on contributions that are made and how they are invested.

  1. When am I vested?

Before we truly dive into this topic, it’s important for you to know that any money you contribute is always 100% vested and yours to keep. Vesting in a retirement plan describes the money the employee has ownership over. What we mean by that is the percentage of funds you put in your 401(k) you own; however, the funds your company matches typically stay the company’s funds until you have been there for a period of time.

Vesting is your legal right to keep what your employer contributes, though each employer has their own vesting requirements. Some companies allow you to instantly keep employer contributions as soon as they are made, whereas other companies make you wait.

  1. How do I track my funds?

Ask your employer about financial planning tools and online statements that can help you monitor your funds performance. You can measure your 401(k)s performance by using appropriate benchmarks, such as a market index that tracks growth and stocks.

  1. What rules surround being able to withdrawal funds?

Typically, when you withdraw funds before 59 ½, you have to pay 10% penalty taxes on the distribution. However, there are instances where you may not have to pay the penalty, such as:

  • Disability
  • Death
  • Certain Medical Expenses
  • Buying a first home
  • Avoiding foreclosure
  • Funeral expenses
  • Adopting a child

Once you turn 72, there are required minimum distributions for your 401(k). How much you are required to take is determined by your account value and your life expectancy.

Choosing a 401(k) plan can be an overwhelming process. Understanding these questions can be crucial to ensure you choose the best plan for your future. If you need assistance with understanding your 401(k) plan and deciding which plan is best for you, please do not hesitate to reach out to our retirement team. We are here for you, and we would love to help you take the right steps to prepare for your future.