6 Questions to Ask Before Signing Up for a 401(k) Plan
If you have a new employer, and they offer a workplace retirement account, there are important questions to ask before signing up for a 401(k) plan.
Each 401(k) plan is unique, which is why it’s important to find out about the details of your company’s plan as well as your options.
It’s critical you know WHAT to ask.
After all, it’s your future we’re talking about here. And it is vital you know where you’re putting your money and why.
Sadly, the 401(k) industry has systematically disconnected the average investor from his or her retirement savings.
With the rise of automatic enrollment in target date funds, complex language that is difficult to understand, and lack of financial education, it’s no wonder many investors are left confused and frustrated.
Not to worry. We’ve got you covered.
Keep reading for 6 questions to ask before signing up for a 401(k) plan.
Question 1: Is There a Company Match, and What Is It?
This is possibly one of the most important questions to ask before signing up for a 401(k) plan.
Company matching is one of the best ways to maximize your 401(k), and it’s often the most overlooked. [link to max your 401k post when goes live]
When your employer matches a percentage of your contribution, it’s like getting FREE money.
And, depending on what your company matches, it may double the amount of what you’re already saving.
Let’s say your company matched 100% up to 6% of your pay. With a $55,000 salary, you could put in 6% or $3,300 for the year, and the company would match this at 100%.
That’s another $3,300 per year of free money that’s yours to keep!
This extra $3,300 doesn’t include compounding interest or your earnings. This is just the additional money you could be saving with your company match.
Question 2: When Am I Eligible to Enroll in My 401(k) Plan?
Some companies require you to work for a specific amount of time before you are eligible to enroll in the company’s 401(k) plan, while others may require you to work for over a year before you can participate.
More and more employers are automatically enrolling employees in their 401(k) plans. However, others still require you to sign up when you’re eligible.
Asking this question upfront allows you to be prepared to enroll as soon as you are eligible. Don’t expect your plan representative to track you down when it’s time to enroll!
If there is a year-long wait period, consider opening an Individual Retirement Account (IRA) and save on your own while waiting.
Question 3: When Do I Become Vested?
Any money you contribute is always 100% vested, and it’s yours to keep.
Vesting is your legal right to keep what your employer contributed. And each employer has their own vesting requirements.
Some require you to stay employed for a specific amount of time before the money the employer contributed to your match is yours. This is known as cliff vesting.
Others let you keep employer contributions as soon as they are made.
Many companies have graded vesting. For example, 20% might be vested after your first year working, 40% vested the second year, etc., until you are fully vested.
No matter what, once you become fully vested, the money is yours to keep.
So, should you change jobs after you are fully vested, you don’t have to return part or all of the money your company matched.
Question 4: What Plan Am I Enrolled In?
Many companies’ 401(k) plans use target date funds (i.e., 2030, 2040, or 2050 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.
According to Marketwatch, “About 70% of U.S. companies automatically enroll employees into 401(k)-type plans, and more than 86% of these firms now direct people’s money by default into ‘target-date funds’ (TDFs).”¹
This is why this is an important question to ask before signing up for a 401(k) plan.
You need to know if your plan automatically enrolls you in a target date fund or not.
Target date, 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…
- Risk tolerance
- Retirement goals and objectives
What target date funds say is that if you are retiring in 2040, you’re just like every other investor planning on retiring that year and, therefore, should have the same investment strategy.
The reality is that target date funds will often underperform in good markets and do a poor job of managing downside risk during tough markets.
A recent article indicated that, on average, target date funds invested 75% in common equity, generating average losses of over 30% during the 2008 financial crisis.
Investors planning to retire in 2010 suffered significant losses because 2010 target date funds increased their common equity exposure in 2007.²
According to Morningstar analyst Jeffrey Holt in March 2018, “In the long run, the biggest risk in target-date funds is that they won’t meet investor expectations for avoiding losses.”³
Question 5: What Is the Cost of My Investment Options?
One way to help maximize your returns is to keep your investment costs low.
Many investments charge investors an expense ratio to cover the fund’s operating expenses. And these fees can get pricey.
If you want to know how much of your return is deducted for the investment’s annual costs, ask your plan provider for an expense ratio for each option.
Question 6: How Do I Change My Investments?
This is another key question to ask before signing up for a 401(k) plan because over time your needs will change, as will the market.
It’s important to know how you can adjust your account allocations. Can you do this online? Do you have to go through your plan provider or fill out a form?
We recommend rebalancing your account allocations each quarter because, contrary to popular belief, a set-it-and-forget-it strategy may often do more harm than good.
If you aren’t rebalancing your account allocations, you may be missing out on earning more and keeping more of your hard-earned retirement savings.
Because unmanaged allocations may experience much larger losses in down markets and may miss the opportunity for growth during good markets.
Want more tips on how to maximize your 401(k) account? Download our no-cost guide .How To Supercharge Your 401(k) Performance Today.
- MarketWatch, Opinion: Target-date funds are more expensive and less effective than this simple investment plan, February 20, 2019
- The Global Financial Crisis and the Performance of Target-Date Funds in the United States – October 1, 2011
- Special Report: Fidelity puts 6 million savers on risky path to retirement, Reuters.com March 5, 2018