How well do you understand your 401(k) plan? The more questions you can answer, the better you understand your plan.
- When can employees join the 401(k) plan?
- Is participation in the 401(k) plan a requirement?
- Can money from a previous plan be transferred into this plan?
- What is the most that can be contributed each pay period and for the year?
- Are there matching contributions and if so, how much is matched?
- When are contributions deposited into the employee’s account?
- When is an employee vested?
- Are investment options available with the plan and if so, what are they?
- Are there any advice services for investment selections?
- How often is reallocation between investment options allowed?
- Can the plan be accessed and managed via the Internet?
- Are loans or hardship withdrawals permitted and how are they repaid?
- When an employee leaves the company, what happens to the 401k plan?
- Can a plan's beneficiary be changed and if so, what is the process?
- Can a worker who is over age 70 ½ continue to make contributions?
- When a worker reaches age 70 ½ are they required to start taking distributions?
Most companies have a set amount of time an employee must be employed before participating in the 401k plan. Most companies also have an enrollment window for new enrollees.
Some company’s require full employee participation while others leave this to the employee. Employers now have the option of automatic participation in their 401k plan so it’s more important than ever to know your company’s policy.
Some companies allow participants to roll funds from previous employer accounts while other does not. Your HR department can tell you the company policy on this and, if you are permitted to do the rollover, can help you with the necessary paperwork.
Each year, the IRS determines the maximum annual tax-deferred contribution allowable in a 401k. Your company’s plan can be any amount up to this limit. Some plans limit how much can be contributed each pay period along with a limit on the yearly contribution. Request a copy of the Summary Plan Description or ask your HR representative what your company’s policy is.
Matching contributions are an added bonus to your 401k plan. Finding out if your company matches and by what percentage will help you decide how much to contribute to your plan if you can’t contribute the maximum. It’s a good practice to contribute at least the amount to get the company matching funds.
Federal regulations require deposits of participant contributions to a 401k be made timely. This means the contributions must be deposited to the plan on the earliest date possible after the deduction is made from the employee’s pay, but in no event later than the 15th business day of the month following the month in which the participant contributions are deducted from their pay.
Vesting occurs when you become the owner of all assets in your plan. Your contributions are vested immediately but the company match might not vest for several years. If you leave the company before you are vested, you will lose that portion of your plan. Knowing the vesting rules is very important if your company contributes matching funds into your 401k plan.
Most companies provide a list of funds in various risk categories for participants to choose according to their specific wants or needs. These funds should be monitored by the plan fiduciary or administrator to be sure they are performing to a certain standard. Some companies offer company stock along with funds for investment options.
While most plan administrators and HR representatives don’t offer specific advice about investment choices, they can help you with general information, literature and online resources. Occasionally a company might contract a financial advisor to sit with employees to review their plans and offer advice.
Every so often, it’s a good idea to look at your investment mix, your long term goals and risk tolerance to be sure you are on track for the best possible return of your investments. Some plans allow reallocation as often as the participant wishes but you should be aware that if you change investments too frequently, you could be charged a redemption fee. Most funds cannot be changed oftener than every 60 days without being charged this fee.
Quite a few plans offer online services for watching and maintaining your investments while others rely on the periodic statement to tell you how your plan is doing. If your plan can be accessed via the Internet, be sure you understand how to set your online account and how to use it.
Each company plan sets its own rules for loans and hardship withdrawals. Loans are repaid the same as any other interest bearing loan. Hardship withdrawals are considered early distributions and are not repaid however you could be charged an early withdrawal fee and income taxes.
Usually when an employee leaves a company they roll their 401k into an IRA. If the option is available, some employees prefer to leave the 401k with the company while others opt to take a withdrawal or a rollover. Ask your plan administrator what the company policy is for an employee who leaves the company.
If you are married, your spouse is your beneficiary unless you have their written permission to name someone else. In a divorce, you would need to find your plan’s policy on changing the beneficiary.
Normally, a worker is permitted to make contributions to a 401k plan for as long as he/she remains employed. Each plan has its own rules though.
Normally, a worker doesn’t have to start taking distributions if still working at the company with the 401k plan. Each plan has its own rules though .
At some point, you will probably need to know the answers to these questions. Now is the time to get the answers.