Nine key questions about your company 401(k)

A 401(k) can be a dizzying topic for new investors. Make sure you ask yourself, and possibly your employer, these key nine questions about the company 401(k).

Elaine Thompson/AP/File
Boeing technical worker Richard Wichels stacks returned ballots before they go into a machine to be opened and readied for a count later in the day Monday, March 18, 2013, in Tukwila, Wash. The union for 7,400 Boeing technical workers counts ballots Monday night in the re-vote on a contract that would replace pensions with a 401(k) retirement plan. Be sure to understand your company 401(k).

1. Which funds should I choose?

Today, most 401(k)s offer a dizzying array of investment options. That can make it difficult to know where to invest your money.

You can feel pretty safe using the “target date funds” your company likely offers. These funds invest at varying risk levels depending on the retirement date to which they correspond. As you get closer to retirement, the fund’s level of risk decreases — that is, its emphasis often shifts from stocks to bonds. These funds have some drawbacks, but are still good choices for many investors.

You can also allocate your funds on your own based on a rule of thumb: Subtract your current age from 100 to get a target percentage of your portfolio that should be made up for stocks, with the remainder going to bonds. For example, if you’re 30 years old, this rule suggests that you keep 70% of your portfolio in stocks. But at age 70, you’d keep just 30% of your portfolio in stocks.

Because people are living longer, some financial professionals have revised the number from which you should subtract your age upward, as high as 110 to 125. This change results in a more aggressive allocation, and helps investors achieve extra growth to cover potentially longer retirements.

Your plan information will list the funds you can choose and describe their risk levels. Each plan will also offer a very low- to no-risk “stable” fund for your non-stock holdings. Make educated choices about how to invest your money based on this information.

2. Should I use a financial professional?

Larger companies sometimes offer fee-based “professional advice” for 401(k) participants. These advisors will manage your retirement portfolio for a fee, usually a percentage of your balance.

Let’s say that your company’s advisor costs 0.7% of your assets under management and you have a $150,000 balance. That means that, in addition to the fees you’re charged by the funds themselves, you’d pay $1,050 a year for a professional to manage the investments in your account. You’ll have to decide whether this makes sense for you.

3. How much do fees impact my portfolio?

Management of 401(k)s isn’t free, but sometimes you end up paying more than you should. According to the Department of Labor (DoL), 401(k) fees can be excessive and reduce your returns over time. The DoL provides this example:

“Assume that you are an employee with 35 years until retirement and a current 401(k) account balance of $25,000. If returns on investments in your account over the next 35 years average 7% and fees and expenses reduce your average returns by 0.5%, your account balance will grow to $227,000 at retirement, even if there are no further contributions to your account. If fees and expenses are 1.5%, however, your account balance will grow to only $163,000. The 1% difference in fees and expenses would reduce your account balance at retirement by 28%.”

Prioritize lower-fee funds when investing your retirement savings. Your plan documents and online resources will show your fees. Once you’re logged into your account online, click on each mutual fund and look at the expenses or fees column. If you need help, ask your plan administrator.

4. How do I get my money out?

Remember, the money you contribute to your 401(k) is always yours. If you need to borrow, withdraw or take distributions of your money, do so through the plan administrator. But be careful: 401(k)s have rules about when you can withdraw your money without a penalty. In most cases, you’ll have to pay a 10% penalty plus regular income taxes on your distribution if you’re younger than 59½.

Keep in mind that any distributions you take will be in cash, which means you’ll need to sell at least some of the investments in the account. If those mutual funds or bond funds have gained value since you bought them, you’ve made money. However, if they’ve lost value, you’ll lock in those losses if you take a distribution.

5. What about taxes?

The rules governing 401(k)s don’t require that you pay taxes on gains from funds you’ve sold, nor do they allow you to deduct losses from sales. But you will pay taxes on the amount you withdraw when you take a distribution.

This makes sense when you think about it from the Internal Revenue Service’s perspective: For many years, the IRS permitted you to defer taxes on the portion of your salary allocated to your 401(k). When you take the money out, the IRS finally collects the taxes on all those years of tax-deferred earnings.

6. What happens when I leave my job?

When you leave your job for any reason — including being fired — you have the right to move your contributed money out of your company 401(k) or leave it there, continuing to be invested. If you want to move the money, it’s best to “roll over” your funds to your new company’s 401(k), to a self-directed IRA or to an IRA managed by a financial advisor.

>MORE: How to Roll Over a 401(k)

>MORE: How to Open a Roth IRA

Avoid taking a distribution or withdrawing your money, if possible. Withdrawn 401(k) money that’s not put into another qualified retirement plan loses its tax-deferred status after 60 days. If you withdraw, rather than rolling over the money to another account, you risk owing taxes and penalties simply because you missed the deadline.

If your company contributed to your account, the plan rules will specify when that money is “vested” — that means it has become yours, and you can take it with you if you change jobs.

7. What happens if my company goes bankrupt or closes?

Company-sponsored 401(k) funds are separate from company accounts and are administered by an entity other than your company. However, if your company goes bankrupt without depositing their promised employer match to your account, you’d lose that money. You might also lose one paycheck’s worth of 401(k) contributions if your employer didn’t yet deposit the money you’d allocated to the plan.

8. Is my money insured?

The type of insurance your retirement money has depends on the type of account that holds it. Your savings could be in bank deposits, basically cash; an investment account, including mutual funds, stocks and ETFs; or a combination of the two.

Retirement funds held in individual bank accounts, through a company 401(k), are insured up to $250,000 by the Federal Deposit Insurance Company. Savings invested in securities — including mutual funds — are insured against fraud or bankruptcy for up to $500,000 by the Securities Investors Protection Corporation, if your brokerage firm is a member (which it probably is). It’s highly unlikely that your brokerage would go bankrupt, but if it did, you’d lose any funds above that $500,000 limit.

Keep in mind that the SIPC does not protect you if your investments do poorly. Any losses you experience due to bad luck or investment decisions will impact your retirement nest egg.

9. What are the primary risks to investing my 401(k)?

If you leave $1,000 in a no-interest checking account, you’ll have $1,000 30 years later. If you leave $1,000 in a mutual fund for 30 years, you could have $100,000 when you withdraw the money, or you could have $0. Investment returns are based on the stock market, and you can lose money just as easily as you can gain it. But if you earn a great return and double or triple your money, your risk-taking will prove to be the right decision.

The bottom line

Company 401(k)s are a great employee benefit and offer a smart way to save for retirement. Unfortunately, many people don’t take full advantage of these plans. Understanding these important aspects of your employer-sponsored retirement savings is a great way to set yourself up for a successful retirement.

This article first appeared at NerdWallet.

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