15 Questions to Ask Your Employer About Your 401(k)

Your workplace 401(k) is designed to make saving and investing easy. Unfortunately, some plans fulfill that mission better than others. All 401(k)s share some basic functionality -- namely, automatic contributions from your paycheck and preset investment selections. Beyond those basics, though, 401(k)s have some freedom to set their own rules.

Understand those rules, and you can save and invest smarter. Start by asking your employer these 15 questions about your new 401(k).

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Your employer may require you to meet certain conditions before you start contributing to the 401(k). The law allows employers to enforce a minimum age of 21 and a minimum employee tenure of one year or 1,000 hours. After you meet those requirements, you may also have to wait for an entry date. That can be the first of the month or quarter.

Waiting a year to contribute to your 401(k) isn't great for your retirement savings momentum. If you have to wait, plan on sending your contributions to an IRA or taxable brokerage account temporarily. There are two main benefits here. One, you'll start building your nest egg immediately. And two, you'll be in the habit of contributing. So it won't feel like a pay cut when your 401(k) eligibility window finally opens up.

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Many 401(k) plans enroll you automatically as soon as you're eligible. This keeps you from missing any available contributions -- but it also requires the plan to set your initial contribution rate. Often, that default rate is lower than you want.

According to the Society for Human Resource Management, the average default contribution rate is 6%. That's about half of what most financial experts recommend to ensure a comfortable retirement.

Make a note to yourself to update your contribution rate as soon as you're enrolled. You can also set your investment selections at the same time.

Speaking of investment selections, the quality of your 401(k)'s investment menu may influence how much money you put into the plan.

Ideally, your plan offers a range of low-fee funds, including an S&P 500 index fund and a target date fund. S&P 500 index funds are popular and as effective as core holdings. Target date funds are appropriate when you prefer the lowest-maintenance option.

Sometimes, your investment choices have very high expense ratios, which puts a strain on your net returns. That would be one reason to split retirement contributions between a 401(k) and another account with better investment options -- such as an IRA.

ALSO READ: 5 Investment Strategies to Maximize Your 401(k)

401(k) fees are another factor that can make retirement saving more complicated. If the cumulative fees in your plan are much higher than you'll pay elsewhere, that's another reason to split your retirement contributions into different accounts.

Ask your employer about the plan's administrative fees and individual service fees. Administrative fees recur periodically. They are applied as a percentage of your account balance or as a flat charge. Either way, the fees reduce your investment returns.

Service fees are one-time costs charged when you access specific services, such as taking a 401(k) loan.

The standout feature of most 401(k)s is the company match program. Company match rewards you for saving -- every time you save to your 401(k), your employer does, too.

If your 401(k) has company match, ask about the match ratio and the salary cap. The match ratio tells you how much your employer contributes for every $1 you contribute. This might be 0.5:1 or 1:1, for example. The salary cap is the highest contribution rate your employer will match.

A common match formula is 0.5:1 matching on up to 6% of your salary. To get your full matching under these rules, you'd contribute 6% of your salary throughout the year. Your employer would then "match" half of that, or 3% of your salary.

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Some 401(k) plans offer profit sharing deposits, often in lieu of matching contributions. Profit sharing contributions aren't as predictable as matching contributions. They usually follow a schedule, such as annually. But the amount allocated to profit sharing contributions is dependent on business results.

To understand the potential of your plan's profit sharing program, ask about the frequency and size of contributions made in the past. You can also ask how contributions are allocated to eligible employees.

Vesting is the ownership transfer of match and profit sharing contributions, from your employer to you. You cannot remove those employer-funded deposits from the account until you are 100% vested (even though they show up in your balance).

Some plans offer immediate vesting. More commonly, you'll earn vesting over time by continuing your tenure with that employer. Your employer might vest you 100% after, say, three years. Or, the vesting might happen gradually -- as in 20% annually for five years.

If you switch jobs before you are fully vested, you will forfeit the unvested company contributions.

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Many 401(k)s offer linked Roth accounts. This means you can choose the tax structure of your retirement contributions. Traditional 401(k) contributions are pre-tax, but then you pay income taxes on your withdrawal in retirement. Roth contributions are after-tax, but your qualified withdrawals in retirement are tax-free.

From a numbers perspective, you'd focus on pre-tax contributions if you expect your income to be lower in retirement. In reality, you may not know how your tax situation will evolve by the time you retire. That's a reason to make both contribution types, so you have tax diversity later.

Your Roth contributions do apply to the annual 401(k) contribution limit, which is $20,500 in 2020, or $27,000 if you're 50 or older.

Some 401(k) plans allow for loans and others do not. If your plan has a loan program, ask about the borrowing limits, fees, and repayment structure.

The law caps 401(k) loans at $10,000 or 50% of your vested account balance, whichever is larger. Your plan can enforce lower borrowing limits, but not higher ones. The IRS also enforces a five-year repayment window, with quarterly repayments. If you used the money to buy your home, the repayment period can be longer than five years. Plans are also allowed to suspend repayments for military service and leaves of absence.

ALSO READ: 3 Reasons a 401(k) Loan Is Better Than an Early Withdrawal

This isn't a 401(k) question, per se. But a health savings account, or HSA, competes with the 401(k) for your retirement contribution dollars.

The HSA has a triple tax benefit. Like the 401(k), contributions are pre-tax and earnings are tax-deferred. Unlike the 401(k), HSA withdrawals are tax-free when you use the money to cover out-of-pocket medical expenses. You can take HSA withdrawals for medical expenses at any time. You can also invest your HSA funds and save them for retirement.

It often makes sense to contribute enough to your 401(k) to max out your employer match, then contribute remaining funds to an HSA, up to the annual HSA contribution limit.

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Increasing your contribution rate annually is one of the best ways to generate momentum in your retirement savings. Sadly, this is also a task that's easy to overlook. Your annual raise hits, you celebrate, and the extra pay gets consumed into the vortex of your spending.

Set up an automatic contribution rate increase -- called auto-escalation -- and that won't happen. Find out if your plan has auto-escalation and, if so, how to enable it.

Rebalancing is the process of adjusting your asset allocation to a set ratio -- such as 70% stocks and 30% bonds. Over time, your allocation will shift as your stock funds appreciate faster than your bond funds. That shift adds risk to your portfolio over time.

Turn on automatic rebalancing, and your plan will periodically make the trades needed to restore your targeted asset allocation. To reduce your stock exposure, for example, you'd sell off some stocks and use the proceeds to buy bonds.

If you don't have this feature, plan on rebalancing manually once a year.

ALSO READ: Is Now the Time to Rebalance Your Stock Portfolio for Cash?

A true-up provision checks your contributions at year-end and adjusts your company match accordingly.

Say your company matches dollar for dollar, up to 6% of your salary. And you make $60,000 per year via 26 paychecks. Assuming you contribute 10% of your salary for 24 of your 26 pay periods, your own 401(k) deposits will total $5,538 for the year.

In that scenario, your matching without a true-up will total $3,323 -- that's 24 paychecks at the 6% cap. With a true-up, the company will adjust your matching contributions up to $3,600. This amount reflects your cumulative contributions, which are well above the 6% cap.

If your plan doesn't have a true-up provision, do your best to contribute in every paycheck year-round. Skip one check and you could miss out.

If you have a 401(k) from your last employer, it's usually wise to roll those funds into your new plan. That way, you're less likely to lose track of your money. It's also easier to manage your asset allocation when all the funds are in one place.

Check in with your benefits manager and ask if the new plan accepts transfers. If the answer's yes, request the forms needed for a direct rollover. Once you turn in the paperwork, your old plan cashes out your investments and sends your balance to the new plan. The new plan deposits the money and invests it according to your selections.

ALSO READ: Rules for 401(k) Rollovers

When you receive your 401(k) account credentials, log in immediately and get familiar with the interface. While you're there, set your contribution rate to 10% or more and make sure you're investing in low-fee funds.

The next step is to explore the resources available in your portal. Hopefully, you see account performance reports, trading functionality, and automation options. You might also find free learning materials to expand your investing know-how. You pay for these resources indirectly by way of 401(k) fees -- you might as well use them.

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Knowing the ins and outs of your 401(k) helps you maximize its value. And that ultimately helps you build financial security for your senior years. So ask those questions now. You need the answers to make full use of the resources and features of your workplace retirement plan.

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