7 Most Common 401(k) Investor Questions Answered
There’s no such thing as a dumb question – especially when it comes to 401(k) investor questions.
The problem is that, for whatever reason, many investors don’t ask.
If this sounds familiar, you’re not alone.
CNBC reports, “Though it’s one of the most common retirement savings vehicles, 63 percent of Americans don’t understand exactly how it works.”¹
When people in the survey were asked 401(k) investor questions, only 37% could answer confidently.
However, more people are beginning to contribute to their 401(k), and people are contributing more yearly.
401(k) investors stashed away an extra percentage point of their salaries in the past year.²
This is excellent news.
As CNBC explains, “That increase may not sound huge, but it can have a noticeable impact on a saver’s nest egg decades down the road. A 35-year-old earning $60,000 a year would save an extra $85,500 by retirement age by increasing 401(k) contributions by just 1% […]. A 45-year-old earning $70,000 a year would have an additional $43,000.”³
Unfortunately, just because people are contributing more to their employee-enrolled 401(k) plan, it doesn’t mean they understand the ins and outs of the plan.
For example, many people don’t know how to read their statements or what happens with their 401(k) if they change employers.
This is a problem.
You don’t want to head into your retirement years without a clear understanding of your 401(k).
Instead, you want to get those 401(k) investor questions answered so you can take full advantage of the plan and maximize your retirement savings.
In today’s blog, we are answering the most common 401(k) investor questions, so you can feel confident making decisions for your future.
What Do I Need to Know before Signing Up for a 401(k) Plan?
Let’s start at the very beginning and answer one of the most common 401(k) investor questions – What is a 401(k) and why should I have one?
A 401(k) is a tax-deferred retirement plan sponsored by your employer.
The reason you want to have one is because the money you stash in your 401(k) grows tax-free.
At this time, many companies automatically enroll employees in a 401(k) as soon as they start working. However, most companies still require you to sign up.
This brings us to the answer to this question – What do I need to know before signing up for a 401(k) plan?
401(k) plans differ from one company to the next, so it is important to ask the following 6 critical questions before you sign up.
- Is there a company match, and what is it?
- When am I eligible to enroll in my 401(k) plan?
- When do I become vested?
- What plan am I enrolled in?
- What is the cost of my investment options?
- How do I change my investments?
The answers you receive to these questions will help you understand your plan.
What Are My Rights as a 401(k) Investor?
Many investors mistakenly believe, since their 401(k) is sponsored by their employer, that their employer handles it.
The money in your 401(k) is your money. It is your account. Therefore, you have rights as a 401(k) investor.
For instance, did you know you can (and should) make changes to your investments?
Don’t feel bad if you are just learning that this is one of your rights.
80% of 401(k) investors fail to rebalance.⁴
Failing to rebalance also often results in more significant losses during bad markets.
Not only do you have a right to make changes to your investments, but you also have the right to independent advice.
We know that all the financial jargon contained in the HR packet you received about your company’s 401(k) makes it difficult to understand your rights.
You have many more rights beyond making changes and seeking independent advice that you need to know.
That’s why we wrote a blog spelling out all your rights as an investor.
Read What Are My Rights as a 401(k) Investor? to learn more.
What Is 401(k) Vesting?
We’ve used the term vesting a few times in this blog already.
If you don’t know what vesting is or how it works, don’t fret. It’s one of the most common 401(k) investor questions.
Vesting refers to what you own as part of a retirement plan, and it represents how much of your employer matching funds you own.
Generally, the company you work for will contribute a certain amount to a 401(k) plan based on your annual contribution.
Vesting, therefore, refers to your legal right to own what your employer has contributed as a company match.
With that being said, each company has unique requirements for vesting.
For instance, your company’s 401(k) vesting schedule may be set up so that you do not own the money your employer contributed unless you are completely vested.
However, any money you contribute to your 401(k) is always 100% vested and is yours.
Still confused? Read What Every Investor Needs to Know about 401(k) Vesting.
What Do I Need to Know About Rebalancing My 401(k)?
As mentioned earlier, many 401(k) investors fail to rebalance.
As a result, these people put themselves at risk of losing in down markets and missing out on growth during good markets.
Not only are you allowed to rebalance your 401(k), but it is also encouraged!
Reallocation is when you revise the percentage of invested assets in different asset classes to balance risk versus reward.
Here’s a scenario to answer this common 401(k) investor question.
You invested money in your 401(k) a few years ago, and you allocated 60% to stock and 40% to bonds. And you haven’t touched it since. If the stock performed well, then you’d have more money invested in stocks, bringing your asset allocation to 80% stocks and only 20% in bonds.
This may seem like good news, but you’ve also put yourself more at risk if the stock market takes a dive.
This may cause your retirement savings to suffer major losses, leaving you with less for retirement than you planned.
In order to get back to a 60/40 asset allocation, you’d need to rebalance your 401(k).
How Do I Read My 401(k) Statement?
One of the 401(k) investor questions many people are embarrassed to ask is how to read their statements.
Don’t be ashamed to ask this question! It’s more shameful to get statements in the mail and toss them without opening them.
401(k) statements will differ depending on the company, but most statements include the following key information about your account at the front:
- Basic information
- Account summary
- Investment allocation summary
- Risk analysis/retirement goals progress
Additionally, your 401(k) statement will usually include a pie chart summary of where and how your money is allocated between different asset classes such as:
- Stocks (Large Cap/Mid Cap/International)
- Money Market/Stable Value/Cash
- Company Stock
- Other Investments
Your 401(k) statement contains much more than these basics.
It can feel overwhelming trying to decipher everything on the statement.
The good news is, there is a blog to help you, complete with images and videos.
I Have a 401(k) with My Old Employer. What Do I Do with It?
At the top of the common 401(k) investor questions list is, What happens to my 401(k) from a former employer?
First things first, don’t assume your former employer is taking care of your 401(k) for you. It’s your plan and your money. You need to take charge.
Fortunately, you have many options:
- Leave your 401(k) account with your previous employer if it is advantageous.
- Roll your old 401(k) into your new employer’s 401(k) plan.
- Roll it into an IRA.
Generally, we recommend rolling it over, but it has to be done correctly or else it will cost you.
Read Avoid These 4 Irreversible and Costly 401(k) Rollover Mistakes to learn more.
How May Professional 401(k) Management Help Account Performance?
At 401(k) Maneuver, one of the 401(k) investor questions we hear a lot is, Why do I need professional 401(k) management?
Account management professionals can help you with the goal to maximize your retirement savings, and working with them will save you time, stress, and mistakes.
In a 2014 Morningstar report, David Blanchett, CFA, CFP, and Head of Retirement Research, stated that participants that received expert guidance had as much as 40% more income during retirement versus those who received no help at all.⁵
Isn’t 40% more income during retirement worth getting some extra help?
Still not convinced you need professional 401(k) management? Read this.
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