Understanding Your 401K Plan

Posted on: Wednesday, January 29, 2014
Answer all of your 401k questions here

A 401(k) investment plan allows you to defer paying income tax on the money you save for retirement, and facilitates the process easily through automatic payroll withdrawals at a rate which you determine. You may even have the added benefit of employer contributions to the plan! Unfortunately, not all 401(k) plans were created equally. Your plan could have sub-par investment opportunities, high fees, and no employer contribution. You should at least know the basics in 401(k) plans.

Consider target dates

How will you allocate your contributions to your fund? When enrolling in a plan, you may wish to seek the guidance provided by a target-date portfolio appropriate for your age. Basically, these portfolios are predicated on your current age, and when you expect to retire. They will help you narrow the focus of your investment options, because they are designed to give you the best strategy for your situation. Many plans have far too many investment options, which only serve to confuse most investors. Using a target-date portfolio, you’ll see a limited range of investment options in various categories, with suggestions which lay out how much you’ll want to invest in each category. As you age, or your financial status changes, you can adjust your portfolio accordingly. 

You’ve probably heard about the importance of diversifying your portfolio. This is the proverbial caution against putting all your eggs in one basket. Stocks, bonds, and other assets should be measured out based on amount of risk someone your age should be ready to assume. You’ll want to be presented with a 401(k) plan that provides you with this diversification.

Track your contributions

For 2014, the maximum that any employee can contribute to a 401(k) plan will remain $17,500, with employees aged 50 and over eligible to contribute an additional $5,500. If you change jobs throughout the year, or work several jobs and contribute to your plan through each employer, you’ll want to track your contributions carefully, in order not to exceed your allotted contribution. This is separate from your employer’s contribution (if any). It only applies to your individual contribution.

Employer Contribution

If your employer offers a matching contribution, then you are working for someone who clearly understands the value of keeping good employees. The typical employer 401(k) match is 50 cents per dollar contributed up to 6 percent of pay. The total contribution limit for both employee and employer contributions to 401(k) plans in 2014 is $52,000 ($57,500 if age 50 or older). Companies with fewer than 15 employees often offer safe harbor plans, which is essentially a company profit sharing plan with a matching contribution of 4% - slightly more than a regular 401(k) plan. 

Many Americans save for retirement, if they save at all, with whatever’s left at the end of their paycheck. The problem is that it’s easy to come up with other uses for the money, so there’s never much left for your 401(k). Take advantage of your company’s plan, and automatically set as much of a percentage as possible aside every week. Plan your investments based on your position in life, and keep track of your contributions. Finally, if your employer offers matching contributions, take full advantage of the generosity being presented to you. Make this investment count, because it is the one you will be most grateful for at retirement.

Questions?

At Core Benefits Group, we know that you have questions and concerns regarding retirement plans, including 401(k) plans, and we are ready to help. Please call us at 1-877-214-2969.

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