Planning for Retirement: What to Ask Before You Open a 401(k)

Most people open a 401(k) with their employer without asking many questions. After all, a 401(k) is one of the most popular types of retirement funds in the United States, given that 80 percent of U.S. workers have access to a 401(k) through their employer.

But not all 401(k) plans are created equal. Employers have control over a number of features of a 401(k) plan, and it’s important to know the fees, matching limits, vesting requirements, and other criteria that can affect the value of a 401(k).

For most people, contributing to a 401(k) makes a lot of financial sense. But before you open your account, you’ll want to ask your employer a few questions.

Does your employer offer any contribution matching?

Employees can offer to match a certain percentage of your contributions to your 401(k), which has a huge impact on the value of investing in this fund.

In general, financial experts recommend making the minimum contribution to a 401(k) to receive the full match from your employer. This is essentially free money that you can’t recoup through other methods. Employer matching is the most valuable feature of any 401(k), so make sure you know the matching terms to take full advantage.

What are the fees associated with the 401(k)?

It’s normal for a 401(k) to charge an expense ratio to cover the costs of managing your money. This fee is usually a nominal percentage of your assets, but it still cuts into your earnings from investments.

A poorly managed 401(k) may charge a high expense ratio which, combined with poor returns, can result in less profit for you, the investor. Find out the details of your 401(k) option’s fees and average performance before you commit your money to this fund.

What investment options does the 401(k) offer?

The investment options within a 401(k) can vary. Typically, you’ll have the option of investing into ETFs and mutual funds, as well as other investment funds. 

Putting money into individual stocks typically isn’t possible unless you’re investing in your company’s stock. You’ll have control over the funds your money goes into, and you can always conduct research on these funds to evaluate their performance and their ratings from third-party organizations such as Morningstar to make sure you’re making the money of your investments and your potential returns.

Are your contributions subject to vesting?

When you make contributions to a 401(k), you’ll receive matching contributions from your employer immediately—but those matching funds may not be immediately yours. 

Many companies require employees to remain with the company for a certain period of time before they’re entitled to take those contributions with them once they leave. This is known as “vesting,” and it’s normal for this period to require 2-5 years of employment before the matching funds are yours to keep.

If you leave before you become vested, you still keep your contributions, but you lose the matching money. Always know the terms of vesting when you’re contributing to a 401(k)—if you leave at the wrong time, you could miss out on thousands of “free” dollars toward your retirement.

Can you make contributions to a Roth 401(k)?

In addition to a traditional 401(k) fund, your employer may offer a Roth 401(k) option. The main difference between these funds is the tax implications. A traditional 401(k) defers taxes owed on your contributions until you make withdrawals in the future—but those contributions and their earnings will be taxed eventually.

With a Roth 401(k), you pay taxes on contributions up front, but can withdraw contributions and earnings tax-free in retirement. A combination of traditional and Roth 401(k) investments can help you optimize your withdrawals during retirement to minimize your tax liability over time.

Over the course of your professional life, a 401(k) could be one of your most valuable investments and a cornerstone of a comfortable retirement. Just make sure you know the terms and conditions of each 401(k) so you can take full advantage of the benefits and reach your retirement goals even sooner. 

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