When you applied for your job, you probably asked whether your company had a 401(k) and whether it matched employee contributions. But most people don’t dig any further than this. That might be all you need to know when you’re considering the job, but if you’re going to actually use your company’s 401(k), you need a deeper understanding of how it works so you don’t accidentally cost yourself money.
You should be able to answer the three 401(k) questions listed below without pausing to think about it. If you’re not sure about some of them, do some research now and consider changing how much you contribute to your plan if necessary.
1. How much am I contributing every month?
You may have set this up when you first joined your company’s 401(k) plan, or your company may have automatically enrolled you and decided how much of your paychecks would go into the account. Either way, you should know how much you’re saving each month, as this is crucial to determining when you can afford to retire.
If you’re unsure how much of your income is going toward your 401(k), you can find out by logging into your online 401(k) account. Your company’s HR department may also be able to provide you with this information, or it may be listed on your pay stub. It could be a flat dollar amount or a percentage of your income. You can change how much you’re contributing at any time through your online account or by contacting your plan administrator.
There is no magic number for how much you should contribute to your 401(k). At a minimum, you should contribute as much as you need to get your full employer match (discussed below) if you can afford to spare the extra cash.
2. How does my company match work?
If you know the percentage of your income that your company matches, that’s a good start. But it’s not the only thing you need to know. Two companies may match up to 3% of your salary, but if one offers a dollar-for-dollar match and the other offers a $0.50-on-the-dollar match, that affects how much you need to personally contribute to get the full 3%. You’d only have to contribute 3% of your salary to get the dollar-for-dollar match, but you’d need to set aside 6% of your salary to get the full $0.50-on-the-dollar match. If you can’t afford to contribute that much, then your match isn’t worth as much as you may have thought.
You also need to understand your company’s vesting schedule, as this determines when you get to keep your employer-matched funds if you leave the company. A few companies may offer immediate vesting, while others may require you to work there for a certain number of years before you can keep any of your 401(k) match if you leave. Then, there are companies that release your funds to you gradually over time. You might get to keep 25% of your 401(k) match if you leave the company after one year, 50% if you leave after two years, and so on.
You don’t need to worry about vesting schedules if you’ve been with your company longer than about six years, but if you’re new, you should know how yours works so you don’t accidentally cost yourself your match. Try to stick it out at the company at least until you’re fully vested, or increase your personal contributions to make up for the employer contributions you’ll lose when you leave.
3. How much are you paying in fees?
I’ll give you a hint on this one: The answer’s not zero. All 401(k)s charge administrative fees to cover the costs of managing the 401(k), and your investments have fees of their own. Some companies may help you out on the administrative fees, but you’re almost always responsible for paying investment fees yourself.
Your plan summary should shed some light on your fees and your prospectus should tell you about any costs associated with your investments. Ask your plan administrator or HR department if you’re not sure where to find this information.
Aim to keep your fees as low as possible so more money stays in your 401(k). You can’t do much about the administrative fees, but you may be able to reduce your investment fees by switching up your investments. Look at all the options your plan has and the fees they charge. If all of them cost you 1% or more of your assets per year, talk to your employer about adding more low-cost investments, like index funds, to your plan.
If your company refuses to accommodate your request, consider moving your savings to an IRA instead if your company also doesn’t offer a match or cover any of the plan’s administrative fees. Not all plans permit current employees to do a 401(k) rollover. In that case, just open an IRA on your own and put your money here first. Then, go back to your 401(k) if you want to contribute more than the $6,000 you’re allowed to put in an IRA in 2020 ($7,000 if you’re 50 or older).
There are a lot more questions you could ask about your 401(k), like whether you’re allowed to take out loans or do rollovers while you’re still employed with the company. But these things will likely only affect you in special circumstances. The three questions above matter all the time, and they can affect how much you get out of your account.
It’s good practice to review your 401(k) contributions once per year anyway, but you should definitely do so if any of the above information surprised you. If you’re paying more in fees than you thought or you realized you’re not taking advantage of your full employer match, increase your contributions now so you can give yourself the best odds of a comfortable retirement.