9 Common 401(k) Questions – Answered
It’s critical to your retirement savings and to your future retirement lifestyle to understand what you’re invested in. If you have a 401(k), this begins with asking questions – the right questions about your 401(k).
Keep reading for the 9 most common 401(k) questions and answers investors have.
#1 Can I Change the Default Investment Option?
Many companies’ 401(k) plans use target date funds (i.e., 2030, 2040, or 2050 funds) or similar funds as their default option, automatically enrolling employees in them.
They can do this thanks to the Pension Protection Act of 2016, which allows employers to direct plan participants’ assets into a target date fund and not be liable should the employee not select an investment.
The good news is you don’t have to stay with the default option.
The first step is to contact your plan representative or HR department and find out if you were automatically enrolled in a target date fund or not. If you are, then, your second step is to find out what other 401(k) investment options are available to you.
#2 What Are Target Date Funds and Are They Right for Me?
Target date funds, or lifestyle funds, are supposed to automatically adjust account allocations throughout life.
Investors are grouped solely based on their expected retirement date. This means target date funds do not take into consideration an investor’s
- Location
- Profession
- Salary
- Risk tolerance
- Retirement goals and objectives
- Retirement savings history
Target date funds were created to take away the hassle of having to research mutual funds in your 401(k) and build and construct your own portfolio. They make investing easier.
But the reality is that target date funds will often underperform in good markets and do a poor job of managing downside risk during down markets.
Target date funds do not take into consideration changes in the economy, tax policy, trade, earning reports, or investment trends – and may not make adjustments for any of these driving factors that affect investment performance.
If these adjustments are not made, you may not stay on course to reach your retirement goals.
Check out our guide 5 Ways Target Date Funds Fail to Live Up to Their Promise.
#3 If My Plan Offers a Roth Option, Should I Contribute to It?
With a traditional 401(k), you put money in pre-tax and get a tax deferral. Meaning, you’ll eventually pay taxes on the pre-tax contributions – as well as the gains – when you withdraw in retirement.
With a Roth 401(k), contributions are made with after-tax dollars, so contributions and any investment earnings can generally be withdrawn tax-free.
To avoid paying taxes on your Roth 401(k) withdrawals, your account must be held for at least 5 years, and you must be at least 59½, or the distribution must be due to disability or death.
Whether or not your 401(k) plan offers a Roth option depends on your specific plan. Check with HR or your plan administrator to see if it’s available to you.
Should your plan offer the Roth option, it’s up to you to decide if it’s right for your retirement goals and objectives.
For More Info, Check Out This Video: Traditional vs Roth 401(k) – Which One is Better?
#4 What Do My Investment Options Cost Me?
Your 401(k) comes with various fees that, when added up, may get pricey and potentially impact your 401(k) return over time.
The U.S Department of Labor requires 401(k) providers to disclose all fees when you enroll in a 401(k). They also require the information be updated and shared every year to reflect fee changes.
For plan participants, this is found on 404(a)(5) participant fee disclosures. For plan sponsors, this is found on 408(b)(2) disclosures.
When it comes to investment option fees, some funds have lower expense ratios than others.
We recommend asking your plan provider for the disclosure that shows how much of your return is reduced for the investment’s annual cost.
Contact your plan provider or HR, and specifically request the 401(k) fee disclosure 408(b)(2) section.
#5 What Is the Max I Can Contribute This Year?
Employee contribution limits for 401(k), 403(b), most 457 plans, and the federal Thrift Savings Plan are $20,500 for 2022.
For those age 50 and older, the 401(k) catch-up contribution is $6,500. If you turn 50 anytime during December of 2022, you’re still eligible to contribute the additional $6,500.
[Related Read: Retirement Plan Contribution Limits for 2022]
#6 How Much Is My Company Match?
The 401(k) company match is a powerful tool that may help you maximize your 401(k) retirement income – without contributing any additional money of your own. It’s basically free money for your future.
How much you receive depends on the terms of your 401(k) plan.
There are different matching structures, and it’s important to know what yours is so you can maximize the amount of free money your company matches.
Many employers match a percentage of employee contributions, up to a certain portion of the total salary. However, some match employee contributions up to a certain dollar amount.
Contact your plan representative or HR department to find out your company’s match – then make sure you at least contribute the match amount.
[Related Read: 4 Ways to Potentially Maximize Your 401(k) Company Match]
#7 What Is My 401(k) Vesting Schedule?
Vesting means ownership when referring to a retirement plan and represents how much employer matching funds you own each year. Vesting schedules vary and depend on your 401(k) plan.
It’s important to know your 401(k) plan’s vesting schedule because – depending on your plan’s 401(k) vesting schedule – you may not own the money your employer contributed until you are fully vested.
Any money you personally contribute is always 100% vested.
However, should you change jobs before you are fully vested, depending on the vesting schedule, you will have to return part or all of the money your company matched.
Your vesting schedule should be clearly spelled out in your plan agreement. If you don’t see it in your info packet, make sure to ask your plan representative or HR department.
[Related Read: What Every Investor Needs to Know about 401(k) Vesting]
#8 Can I Change My Investments to Match My Current Needs?
Over time, your risk tolerance, market conditions, and tax regulations may change. And it’s important to know how to change your 401(k) investments if you want to maximize your returns.
Making changes is called rebalancing. Rebalancing is the process of realigning the holdings of the assets in your portfolio. This can involve periodically buying and/or selling assets in the portfolio in order to maintain the initial desired level of asset allocation.
Understanding how to rebalance is critical because things change and you want your account to reflect these changes.
If you aren’t rebalancing, you may run the risk of unmanaged allocations experiencing much larger losses in down markets and miss the opportunity for growth during good markets.
Make sure to ask the following questions of your 401(k) plan provider:
- Can I make changes to my investments online?
- Do I have to go through the plan provider or fill out a form?
- How often am I able to make changes?
It’s not only important to know how to make changes to your investment menu, but you also need to know how to review and verify these changes to ensure they’re accurate.
If you are able to verify online, make sure you have access to this information and understand what it is that you’re looking at.
[Related Read: What Every Investor Needs to Know about Rebalancing a 401(k)]
#9 How the Heck Do I Make Sense of My 401(k) Statement?
It’s not enough to just open and glance at your 401(k) statement – it’s important you know how to read it so you know how it’s performing and if you are on track to meet retirement goals. It also lets you know exactly what you’re paying in fees.
The problem is many investors fail to even open their statement. And those who do, often have no idea what they’re looking at.
That’s why we created a 2-part video series on how to read and understand your 401(k) statements.
Do your future self a favor and watch the videos below.
Where to Get Professional 401(k) Account Management
401(k) Maneuver exists to help employees grow and protect their 401(k) accounts.
We provide independent, personalized professional account management to help employees, just like you, grow and protect their 401(k) accounts.
And we do this without in-person meetings so you don’t have to drive to an appointment or spend hours preparing for the meeting.
Our done-for-you, virtual service allows you to keep your 401(k) right where it is while we review and rebalance your account as needed based on your risk tolerance and current market conditions.
All you need to do is to connect your account to our secure platform, and we manage your account for you. There’s no need to move your account – you can keep it right where it is.
As a fiduciary, we are bound by law to put your interests first, and we do not receive commissions on the transaction, or when we rebalance your account.
Have questions about your 401(k) performance? Book a complimentary 15-minute 401(k) Strategy Session with one of our advisors.
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