Be Smart About your 401(k) Plan

Published May, 2018

There are two frequently asked questions about 401(k) plans:

1. Should I invest in the 401(k) plan that is offered by my employer?

Yes, you should maximize your contribution if you are able, unless you have better investment options elsewhere.

Here is a list for your consideration:

• Get the company match: Many companies incentivize saving by offering to match 401(k) contributions up to a specific amount each year. Saving less than the match is turning away free money. For that reason, start out by saving at the matching level. Getting your company’s full match is the minimum you should do.
• Don’t front load: If your employers spread out their 401(k) payments over the entire year, you should not maximize your 401(k) contribution early each year. If there is no contribution by you in one pay period, you company could choose not to pay the match. Pay attention to your employer’s policy.
• Pay attention to fees: Compare the management fees that the 401(k) provider or the fund manager charges vs. your other investment options. If the fees of your 401(k) plan are higher and your employer does not offer to match, you could be better off investing your retirement savings elsewhere.

2. Should I roll over the 401(k) offered by my employer to an IRA when I leave my job?

It depends. You should consider the following when making the decision:

One reason for rolling over a 401(k) plan into an IRA is that having multiple 401(k) plans can be risky when they are invested in different ways. It is difficult to analyze what you own with scattered money under different fee schedules. By rolling the multiple accounts into one single IRA account, it becomes easier to manage your money holistically and choose investments that fit your long-term goal while keeping costs down. Another reason is management fees. Once you leave your employer, your 401(k) plan may be subject to higher fees as you become a former employee.

There are reasons for not rolling over a 401(k) if the ability to borrow from the fund is important to you:

• Earlier penalty-free access: If you retire from a company at age 55 or older, you can get penalty-free access to your 401(k) account. Once you roll your 401(k) into an IRA, you lose that ability to withdraw the funds penalty-free (not tax-free) at age 55. The IRA rules require you to wait until age 59 ½ to gain access to those funds without penalty.
• Ability to borrow against the funds. You can’t borrow from an IRA but many 401(k) plans have loan provisions that allow you to borrow up to 50% of your 401(k) balance (with a maximum loan of $50k) while you are actively employed with your company. Check your company policy to verify that you can borrow against the funds as not all plans allow that.