When you start a new job, there's a lot to learn -- and not just about how to do the job you've been hired for. Understanding your employee benefits is crucial, and one of the most significant benefits -- and certainly the longest lasting -- is the 401(k) account. Here's what you need to know to make the right choices about your retirement savings.
1. "Do you have a 401(k)?"
This is one question you might want to ask before you're even hired, since if you're deciding between multiple job offers that are equally compelling, the benefits packages might be a factor in your decision. Once you come on board, most employers will proudly tell you about all their benefits, 401(k) included, but if your HR person doesn't mention it, it's worth asking. If nothing else, requesting a 401(k) plan might motivate your employer to start offering one, especially if a number of employees get involved.
2. "What's your matching contribution?"
Many employers try to motivate employees to contribute to their 401(k)s by offering to match a certain level of contributions. In other words, a company might offer to contribute up to 3% of your salary to your 401(k) account, but only if you also contribute 3% of your salary out of your paycheck. Other employers will set the salary percentage higher, but may only contribute, say, 50% of what you do. For example, if you contributed at least 5% of your paycheck, your employer might contribute half of that.
It's very important to understand exactly how your own company's matching system works, because at the very least you want to contribute enough to max out that matching contribution. And if your employer doesn't have a matching contribution program, again, requesting it might inspire them to add one.
3. "What are the fees?"
The companies that provide your 401(k) and the ones that manage the investments within it generally charge for those services. The administrative fees for the 401(k) plan itself may be built into the investment-specific fees, may be paid by your employer, or may be charged directly against the assets inside your account. And the various funds and ETFs that your 401(k) trustee offers will each charge various types of fees. Also, certain actions on your part may trigger special service fees. For example, rolling over your 401(k) balance into another 401(k) or an IRA will often cost you a little something. Find out what all these fees are and who pays for them -- before you incur them. If your HR representative doesn't have the answers, call the 401(k) trustee and ask them.
4. "What's the vesting schedule?"
The contributions that you make to your 401(k) are always yours to do with as you please, but employer contributions (including company matches) are another matter. The company's vesting schedule determines how long it takes for you to fully own those company contributions. Usually a company will require that you work for them for a certain length of time before you're vested in those contributions, based on one of a variety of vesting schedules.
For example, some companies use a "cliff vesting" system, meaning that once you've been an employee for a certain number of years you instantly own 100% of the employer contributions in your account. Others use a "graded vesting" schedule, meaning that you gradually own more and more of the company's contributions the longer you work there. After one year of employment you might own 20% of the company's contributions; after two years you might own 40%; and so on until you own it all after completing five years of employment.
The vesting schedule becomes important if you decide to change employers before the vesting period is up. In the above graded vesting example, if you left after two years of employment, you'd get to keep 40% of whatever contributions your former employer made to your 401(k) and the employer would take back the rest.
Making the most of your 401(k)
All of these questions help you to make wise investing decisions that will allow you to maximize the returns you get from your retirement savings. For example, understanding fee schedules means that you'll be able to choose the investments that have the best combination of returns and fees, which means they'll yield the most for you. Skillfully overseeing your 401(k) and its investments means that you won't need to save as much, since you'll be getting higher returns on the investments. And that means more money to enjoy right now.
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