Employee Benefit Plans: The 411

Valuable Information on 401ks, Pensions, ESOPs, Form 5500 Preparation + More

The do’s and don’ts of participating in a 401(k) plan

401(k) plan, employee benefit plans, retirementWhether you’re currently enrolled in a 401(k) plan, or about to enroll in a 401(k) plan, consider the following:

The do’s

Do participate if there is an employer match, and make sure you receive the maximum match

If your employer offers a 401(k) plan, they likely also offer an employer match. The employer match can be thought of as free money or a guaranteed return on your investment and, therefore, you should always contribute enough so that you receive the maximum match.

Do consider participating even if there isn’t an employer match

Even if your employer doesn’t offer a match, a 401(k) plan is beneficial in that the annual contributions you make will reduce your taxable income. However, keep in mind that while you avoid taxes now, your distributions later in life will be taxed like ordinary income.

As an alternative, you may find that it makes more sense to invest in a post-tax (e.g. Roth) account where contributions are taxed and distributions are not.

Do verify the accuracy of your 401(k) activity

The employer has many options when creating a 401(k) plan, which can lead to numerous plan details that can be overlooked and cause errors. Accordingly, you should always verify the accuracy of your 401(k) activity by comparing it to the plan documents. Ultimately, you should approach your employer and ask questions if you have any uncertainties.

The don’ts

Don’t forget about vesting

If you plan on quitting a job where you’ve contributed to a 401(k) plan, consider your plan’s vesting schedule. While you’re always 100% vested in your own contributions, your employer contributions may vest over time. You will forfeit any contributions that are not 100% vested. While you don’t always have control over when you have to leave your employer, consider waiting until the next vesting period if possible.

Don’t let your 401k() plan be your only retirement savings

Make sure you save outside of a 401(k) plan. The penalties and taxes associated with taking a distribution prior to the normal retirement age of 59 ½ can be costly. While there are certain exceptions that allow you take a distribution penalty free, it should be a last resort.

Don’t put off enrolling (especially if an employer match is offered)

While some plans have an auto-enrollment feature (which means you are enrolled unless you opt-out), not all have this option and you have to enroll yourself. You could be missing out on employer contributions (a.k.a free money) for an extended period of time if you delay enrollment.

Don’t anticipate someone managing your money

Just because a 401(k) plan can be a long-term investment, doesn’t mean you should just set it and forget it. While your plan should have fiduciaries that provide plan oversight, they are not going to manage your money. You should know your retirement timeline, your risk profile and the market, and invest accordingly. You should review your quarterly statements and properly plan your retirement savings.

Michael Guido, CPA