New Job? 7 Questions You Must Ask About Your Retirement Plan
So you’ve found a new job. That’s great news. Except for the paperwork, of course. From a W-4 to health insurance information, a new gig means lots of forms to fill out. By the time you get to the information about your retirement plan, you’re likely to be bored and bleary-eyed. But don’t let fatigue lead you to make mistakes that will come back to haunt you later.
Whether it’s putting off enrolling in the plan or picking investments at random, an uninformed approach to retirement planning won’t yield great results. Start things off on the right foot by asking these seven essential questions about your 401(k).
Tip: The answers to most of these questions should be included in your plan’s summary description, which you should have received from your employer or HR department.
1. What is the employer match?
Not every company matches employee 401(k) contributions, but if yours does, you’d be a fool not to take advantage of the perk. After all, skipping the employer match is basically like turning down free cash.
If you’re lucky enough to get a match, find out how much it’s worth. This will usually be expressed as a percentage of your total salary rather than a round number. For example, your company might match 100% of your contributions up to 5% of your salary. Or they might give you 50% up to 8%. To get the full benefit in the latter situation (or a 4% match), you’ll need to save more out of your own pocket.
2. When are matching contributions made?
In addition to finding out how much of a match your company offers, you’ll also want to ask when matching contributions are deposited in your account. Usually, employers match your contributions every pay period, but a few make lump-sum deposits at the end of the year.
The timing of your match matters for one big reason: If you and your employer part ways before the money ends up in your account, you’ll leave empty-handed. Plus, people who stick to a dollar-cost averaging approach won’t like that they’ll be making one big investment at the end of the year.
3. What investment options do I have?
You’ll have a choice of where to invest your retirement savings, and it’s not a decision to be made lightly. Dozens of investment options may be available, from all-stock investments to all-bond funds. You may also be able to invest in company stock or annuities. Every investment has a different cost and comes with a different amount of risk.
Most 401(k)s will offer target-date funds, which include diverse investments based on your expected retirement date. If you’re not sure where to put your retirement money, a target-date fund might be a good choice.
4. What are the fees?
An alarming number of people seem to be under the impression that investing in their 401(k) is free. It’s not.
Fifty-eight percent of Americans think that they’re not paying anything in 401(k) fees, according to a recent survey by the National Association of Retirement Plan Participants. That’s a problem, because fees chip away at your overall investment returns over time, leaving less money for you when you retire. You can’t avoid fees, but you should know what they are so you can take steps to minimize them if possible.
Your plan administrator is required to mail you a statement once a quarter that describes the fees you’re being charged, including plan administration fees, service fees, and investment fees. The latter is the one you’ll want to pay the most attention to.
How much is too much? It depends. Expect to pay more for an actively managed fund than a passively managed one, or if you work for a small employer.
“If they’re paying more than a half a percent in expenses on the funds in plan, that’s a red flag, and they should ask the employer why they’re paying that much,” said Jerome Schlichter, an attorney who has sued companies in an attempt to make retirement plan fees more transparent, in an interview with PBS.
5. How long until I’m fully vested?
Vesting is a fancy way of describing who owns the assets in your retirement account. If you’re fully vested, all the money in the account is yours, including any contributions made by your employer. So, if you decide to switch jobs or you’re terminated, you don’t lose those funds. But if you’re not fully vested and you leave your job, you’ll forfeit the contributions made on your behalf.
Your company is free to design its own vesting schedule. You may be fully vested after a year or three years on the job, or you may become gradually vested over time (25% after one year, 50%, after two years, etc.).
One thing to keep in mind: Your own contributions to the plan are always 100% vested.
6. What happens if I leave the company?
In addition to familiarizing yourself with the vesting schedule, you’ll want to find out what might happen to your 401(k) if your employment comes to an end. Depending on your balance, you may be able to leave the funds where they are, but if you have less than $5,000 in your account, you may be forced to roll it over to an IRA or new 401(k), or cash out, says Fidelity.
Another thing to find out: What happens if you’ve taken a loan from your 401(k)? In many cases, you’ll be required to repay the loan within a month or two if you quit or are fired. If you can’t repay the loan, you’ll get hit with early withdrawal penalties and fees.
7. Can I get help?
Overwhelmed by making 401(k) decisions? Don’t despair. More employers are adding financial wellness services (including retirement advice) as an employee benefit, according to a 2015 survey by Aon Hewitt. Typical services include phone access to financial advisers and online, third-party investment advice.
“If your plan includes these managed services, you’d be wise to take advantage of them,” writes Catherine Golladay, Vice President of 401(k) Participant Services at Charles Schwab. “Our data shows that people who took advantage of independent, professional 401(k) advice tended to increase their savings rate, were better diversified and stayed the course in their investing decisions,” Golladay added.
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