Somewhere on your company's HR website, you'll find a 401(k) plan document (or similar) that outlines the rules and regulations behind your firm's retirement structure. While it's common knowledge that no employee has ever read these documents from end to end -- other than those responsible for writing them -- it's important to know the key details so that you're able to fully capitalize on any benefits your company is willing to offer. In this article, I'll outline the four must-know pieces of information from your company's 401(k) plan.
1. Your company's match details
Many companies will offer some form of employer-matching. In other words, for every dollar you contribute to your company's 401(k) plan, your employer will match that contribution up to a specified percentage of your compensation -- commonly 4%-6%. It's critical that you contribute at least as much as your company is willing to match, as the return on those contributions is a guaranteed 100%: Every dollar you contribute is doubled with no risk attached. Contributing beyond the match amount up to the annual maximum (currently $19,500 in 2020) is recommended, but may not be possible if other financial priorities are present.
It's also essential that you understand how your company provides this match. Do they simply add cash to your plan and expect you to reinvest it? Do they automatically add it to your current asset allocation? Or -- in the worst case -- do they provide the employer match by investing it into the company's ESOP plan? Essentially, this not-so-ethical practice refers to taking your employer match money and investing it directly into company stock as a default choice, regardless of your preset asset allocation. Not only is this not a great look on behalf of your company, but it throws off your asset allocation and will require you to rebalance the plan any time the employer deposits match money.
2. The investment menu
Most 401(k) plans will give you a lineup of investment options in size four font without any simple explanation as to what each choice means. The result is that many people haphazardly invest or just go for purely conservative options like "Stable Value" or "Money Market" funds. To fully understand the different choices, ask for help from the plan administrator, or be willing to dig into each investment choice and learn as much as you can. The key metric of each fund is its expense ratio, and many plans charge exorbitant fees -- if this is your company's plan, it's likely in your interest to contribute money just up to the match and open a taxable account to invest surplus money. Don't allow your company's plan sponsor to lure you into expensive funds that you don't need -- remember, investing is now free or at least close to it.
3. The vesting schedule
"Vesting" is simply a fancy word for letting employees know when the money in their retirement plans is actually theirs to keep. Some companies require you to be employed for one or two years before they'll allow employer contributions to vest, meaning if you leave the company within six months of starting, you'll lose any amounts that your employer contributed to the plan. Many employers tend to allow money that you've contributed directly to vest completely and immediately, and often have stringent vesting of employer-contributed money. The best advice here is to simply know the schedule, and know what's expected of you in order to keep the money that's been earmarked for you. If you're in line for sizable vested amounts by simply staying at the company for another few months, that needs to be included in any stay-or-go calculation.
4. Loan or withdrawal provisions
The sincere hope is that you'll never have the need to dip into your retirement savings to fund current expenditures, but there are times -- perhaps in the event of a global pandemic -- that this may be necessary. Under coronavirus-related legislation, you're able to borrow up to 100% of the plan balance or $100,000, whichever is less -- but not all employers offer loan provisions. This is why it's important to read the section on permitted loans, including details on potential penalties, interest charges, and the time you'll have to repay the money. Taking from your 401(k) plan should be a last resort only utilized in dire emergencies, but it's still important to know your employer-specific circumstances so you are at least aware of what you're up against.
Know these to maximize your benefits
These four items are simply critical for you to know to get the most out of your 401(k) plan, and it is well worth your time to check them out and write them down. You're much more likely to have a sense of control over your finances when you know the important details.