401k planning: 5 questions to ask

Published on August 12, 2020 | LPL Financial

When was the last time you took steps to optimize your 401k?

If it’s been a while, you’re not alone. Research indicates that only one in three Americans utilize employer-sponsored 401k retirement accounts; even those who are contributing may not be taking full advantage of potential benefits.¹

Here are five questions to ask about 401k planning.

1. How are 401k funds invested?

How does your company invest employee retirement funds? Many 401k plans allow participants to choose from a range of investment options, such as mutual funds, stocks, or bonds. Proper asset allocation helps ensure diversification. Aim for a balanced mix over a range of investment vehicles.

For younger investors, a more aggressive approach may make sense, as they’ve got more time to recover from losses. For older investors who are nearer retirement, a more conservative approach may be beneficial. Either way, your investments should align with your tolerance for risk and your time horizon.

2. Does my employer match contributions?

Many companies will match the contributions you make to your 401k. Usually, the match is a percentage of the amount you contribute, but some employers offer dollar-for-dollar matches.

Find out your company’s policy and take full advantage of it. If you don’t, it’s like you’re throwing away free money. Plus, thanks to the power of compounding interest, an employer match can help your retirement savings grow exponentially.

3. What about the expense ratio?

Investment vehicles, such as mutual funds, often charge expense ratios. This cost is usually based on a percentage of the fund’s net assets, and it’s passed along to shareholders.

Expense ratios cover operational costs such as:

• Administration
• Management
• Marketing
• Compliance
• Record-keeping
• Distribution

Expense ratios cut into your returns, so look for funds with low ratios. Keep in mind that expense ratios affect returns over the long term; even if an investment has high returns, a high expense ratio can negate it.

4. When am I fully vested?

The contributions you make to your 401k are fully vested. That means you can keep them even if you leave your job.

But the contributions your employer makes may be a different story. Often, you’ll have to work for the employer for a certain amount of time before you can take those funds with you. This system is known as a “cliff” vesting schedule.

Some employers use a “graded” vesting schedule, in which a certain percentage becomes available after specified time periods pass. For instance, you may be 50% vested after three years on the job, and 100% vested after five years.²

5. When can I receive distributions?

Usually, you can start withdrawing from your 401k without penalty once you reach age 59 1/2.³ If you withdraw before that age, you have to pay a penalty and income taxes. In certain cases of hardship, the IRS may waive the penalty.

After you reach 72 years of age, you must take at least minimum distributions. Your age and account value will determine the minimum amount you must withdraw.

Asking these questions can help you make the most of your 401k.

Important disclosures

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial professional prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly.

The information provided is not intended to be a substitute for specific individualized tax planning or legal advice. We suggest that you consult with a qualified tax or legal advisor.

LPL Financial Representatives offer access to Trust Services through The Private Trust Company N.A., an affiliate of LPL Financial.

Sources 

¹https://www.marketwatch.com/story/even-75-of-americans-in-the-best-401k-plans-wont-have-enough-to-retire-2019-04-18

²https://money.usnews.com/investing/articles/2017-06-26/5-questions-investors-should-ask-about-their-401k-plans

³https://www.investopedia.com/articles/personal-finance/053014/five-questions-ask-about-your-companys-401k-plan.asp