4 essential things to look for in your business 401 (k) plan


Somewhere on your company’s human resources website, you’ll find a 401 (k) (or similar) plan document that outlines the rules and regulations that underpin your company’s retirement structure. While it is common knowledge that no employee has ever read these end-to-end documents – other than those responsible for writing them – it is important to know the key details so that you can take full advantage of them. benefits your business wants to offer. In this article, I will outline the four essential pieces of information in your business 401 (k) plan.

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4 essential things to look for in your business 401 (k) plan

1. Correspondence details of your business

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 earnings – typically 4% -6%. It is essential that you contribute at least as much as your business is willing to match, because the return on those contributions is 100% guaranteed: every dollar you contribute is doubled without risk. It is recommended to contribute in excess of the matching amount up to the annual maximum (currently $ 19,500 in 2020), but this may not be possible if other financial priorities are present.


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It is also essential that you understand Comment your company provides this correspondence. Are they just adding money to your plan and expecting you to reinvest it? Do they automatically add it to your current asset allocation? Or – in the worst case scenario – do they provide the employer’s counterpart by investing it in the company’s ESOP plan? Essentially, this not-so-ethical practice is to take your employer’s matching money and invest it directly in company stocks as the default choice, regardless of your predefined asset allocation. Not only does this not look good on behalf of your business, but it hurts your asset allocation and will force you to rebalance the plan every time the employer deposits an equivalent amount.

2. The investment menu

Most 401 (k) plans will give you a range of investment options in font size four with no simple explanation of what each choice means. The result is that many people invest at random or simply opt for purely conservative options like “Stable Value” or “Money Market” funds. To fully understand the different choices, ask the plan administrator for help or be prepared to dig deeper into each investment choice and learn as much as possible. The key metric of every fund is its expense ratio, and many plans charge exorbitant fees – if this is your company’s plan, chances are you’d be better off putting money up to the limit. and to open a taxable account to invest the excess money. Don’t let your company’s plan sponsor lure you into expensive funds that you don’t need – remember the investment is now free, or at least close to it.

text: Calculator and cash with magnifying glass and reading paper 401 (k) Plan

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Calculator and cash with magnifying glass and paper reading 401 (k) Plan

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3. The acquisition schedule

“Acquisition” is simply a fancy word to tell employees when their pension money is theirs. Some companies require that you be employed for one or two years before allowing the vesting of employer contributions, which means that if you leave the company within six months of the start, you will lose any amounts that your employer contributed to the plan. Many employers tend to allow the full and immediate vesting of the money you contributed directly and often have a rigorous vesting of the amounts paid by the employer. The best advice here is to just know the timeline and know what is expected of you in order to hold onto the money that has been set aside for you. If you are online for large vested amounts by simply staying with the business for a few additional months, this should be included in any “stay or go” type calculation.

4. Provisions relating to loans or withdrawals

The sincere hope is that you will never need to dip into your retirement savings to fund your living expenses, but sometimes – perhaps in a global pandemic – it is necessary. Under coronavirus legislation, you can borrow up to 100% of the plan balance or $ 100,000, whichever is less, but not all employers offer loan arrangements. That’s why it’s important to read the section on authorized loans, including details on potential penalties, interest charges, and how long you’ll have to pay back the money. Taking out of your 401 (k) plan should be a last resort used only in serious emergencies, but it’s still important to know your employer’s unique circumstances so that you’re at least aware of what you’re up against.

Know them to maximize your benefits

These four elements are just essential for you to know how to get the most out of your 401 (k) plan, and it’s worth checking and writing down. You are much more likely to have a sense of control over your finances when you know the important details.

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