Introduction
401(k) plans are considered one of the most important retirement saving tools in the United States. However, when it comes to evaluating a 401(k) plan, there are many factors to consider. In this article, we will review the key things to look at when evaluating a 401(k) plan, including eligibility to start investing, contribution limits, available investment options, employer matching contributions, plan costs, borrowing options, waiting periods, and availability of personal advice.
1. You can start investing in a 401(k) plan immediately
Plans that provide immediate eligibility to start investing in a 401(k) plan are among the best plans. In fact, some employers automatically enroll new employees in the plan.
2. No contribution limits
The Internal Revenue Service sets limits on how much you can contribute to a 401(k) plan or similar plan each year. You should be able to invest the full allowable amount in your plan if you wish to do so, but some companies set their own limits that are lower than the guidelines. Some employers even restrict additional contributions, which are aimed at helping individuals accumulate more funds as they approach retirement age.
3. A variety of diverse investment options are available
You may not use most of the investment options in your 401(k) plan, but having them can help reassure you that you can invest in the way you choose. There should be several low-cost mutual funds available that do not charge fees, including index funds and actively managed funds.
4. The employer matches your contribution
Employer matching your contribution at 3 to 6 percent of your contribution is like getting a salary increase of 3 to 6 percent. It’s easy money, and it becomes even easier thanks to generous matching policies for employees.
5. Plan costs are low or covered by the employer
It can be hard to know what you’re paying for your 401(k) plan, but some employers cover the cost of the plan itself while passing it on to other employees. The less you pay for your plan and the investments within it, the greater your potential for savings.
6. Loans are an available option
This is not to say that taking a loan is a good idea, but if you’re in a pinch, a 401(k) loan is a better option than an early withdrawal. Hardship withdrawal options will also be available in great plans for those who qualify.
7. The plan is easy to understand (or offers plenty of education and guidance)
If you feel confused before joining the plan or every time you open a quarterly statement, that’s not a good sign. Retirement plan departments have the resources to provide proper investor education. You should feel free to ask many questions and ensure everything is clear before making decisions about the plan.
8. No waiting period
If the employer offers a match but makes you wait seven years before you receive full benefits, how much do you really get if there’s a good chance you may not want to stay that long? Plans that feature shorter or no waiting periods are more generous.
9. Personal advice is available if you need it
Do you have a question? Would you like personal investment advice? A good plan will provide you with a means to get someone who can help you with such matters. You may need to pay an extra cost for the advice, but a good plan will clarify this and keep costs reasonable.
Conclusion
When
Evaluating a 401(k) plan involves considering several different factors. A good plan should offer eligibility to start investing immediately, no contribution limits, a variety of investment options, employer matching contributions, low plan costs, the ability to borrow, no waiting period, and access to personal advice. By looking at these factors, you can make an informed decision about the 401(k) plan that fits your retirement financial needs and goals.
Source: https://www.thebalancemoney.com/how-to-judge-a-401k-plan-2894196
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