Emily Brandon

A good 401(k) plan can boost your chances of a secure retirement and perhaps even allow you to retire sooner -- if you take advantage of it. A generous employer contribution and low-cost investment options coupled with the tax deferral will help your savings grow. Conversely, an expensive 401(k) plan with poor investment choices will make it more difficult to save for retirement.

Here's how to tell if your company has a competitive 401(k) plan:

Employer Matching Contributions

One of the most significant advantages of a 401(k) plan is employer matching contributions. If your employer matches a portion of your contributions, that's essentially free money. A good 401(k) plan will offer a substantial employer match. Typically, a 50% to 100% match on the first 3-6% of your salary is considered favorable.

A generous 401(k) match will help you grow your nest egg quicker. The median employer 401(k) contribution was 3 percent of a participant's pay. But 401(k) matches ranged from less than 1 percent to more than 10 percent of salary and were matched according to more than 200 different formulas, a recent analysis of 2,200 retirement accounts with more than 3 million participants administered by Vanguard found. Plans also differ greatly in the amount workers must save to receive the entire match. The median 401(k) plan requires employees to save 6 percent of pay to maximize their 401(k) match. Some employers don't offer a match at all, or reduce or eliminate contributions in years when the company performs poorly.

Waiting period

You can't always begin participating in a company's 401(k) plan as soon as you are hired. Only about half (51 percent) of employers allow workers to contribute to the 401(k) immediately upon joining the firm, Vanguard found. Other companies require between one and three months (25 percent) or even an entire year (15 percent) of service before employees are permitted to participate in the retirement plan. "If you change jobs seven times in your lifetime, and every time you change jobs you have to wait a year, you are basically wiping out seven years' worth of contributions," says Matthew Hutcheson, an independent fiduciary and pension consultant. After qualifying to participate in the plan, most employees have to wait even longer to qualify for the 401(k) match. Just 40 percent of companies immediately provide a 401(k) matching contribution to employees who save for retirement. And more than a quarter (28 percent) of companies don't contribute to retirement accounts until a worker has spent a full year at the company.

Vesting schedule

Understanding the vesting schedule is crucial. It defines how long you must stay with your employer before you are entitled to the employer's contributions. A shorter vesting period is typically more favorable.

Many workers don't get to keep their 401(k) match until it is vested. Just over a third (37 percent) of employers allow workers to keep the 401(k) match as soon as it is deposited, according to a Profit Sharing/401k Council of America survey. Other companies require you to stay with the company for several years before you can keep the match or allow you to keep only a percentage of the match based on job tenure.

"In general, you should be fully vested within six years," says Marcia Wagner, founder and principal of Wagner Law Group in Boston. Retirement accounts with no or short vesting schedules are generally the best deal for employees who think they might stay with the company for less than six years. Those who leave the company before they are vested forfeit some or all of the 401(k) match.

Investment choices

Most 401(k) plans offer a limited range of investment options. The average 401(k) plan offers 25 investment options including equities, bond funds, balanced or lifecycle funds, and money market or stable value options. But most participants (61 percent) used three or fewer of those options.

"Most 401(k) plans brag about how many choices they give to people," says Dan Solin, senior vice president of Index Funds Advisors and author of The Smartest 401(k) Book You'll Ever Read. "The problem is that very few people are capable of putting together a globally diversified portfolio and an asset allocation that makes sense for them." He says a good 401(k) plan includes at least three low-cost index funds, ETFs, or passively managed funds, and at least one target-date or lifecycle fund. Ideally, your employer would also provide easy-to-understand information about the expenses associated with each investment option

A quality 401(k) plan will offer a range of investment options, including a variety of mutual funds, index funds, and target-date funds. Diversified investment options allow you to build a well-balanced and risk-appropriate portfolio.

Low Fees

The fees associated with your 401(k) plan, including management fees and administrative expenses, can significantly impact your overall returns over time. A good 401(k) plan will have competitive and transparent fees.

Responses to employee needs

Employers use 401(k)'s to attract and retain productive workers. If you're not happy with your 401(k) plan, consider suggesting changes to your human resources department. "Ask your employer to consider making enhancements to the plan and suggest one or two -- or no more than three -- things," says Hutcheson. "Show the employer how the change would impact how much you have at retirement. I have found time and time again that very seldom does an employer say no to that."

Access to Financial Education

A good 401(k) plan often provides educational resources and tools to help employees make informed investment decisions. Look for access to online calculators, investment seminars, or financial advisors.

Auto-Enrollment and Auto-Escalation

Some plans offer features like auto-enrollment (automatically enrolling employees in the plan) and auto-escalation (increasing your contributions annually) to encourage retirement savings. These features can be very beneficial.

Loan and Withdrawal Options

Assess the flexibility of your plan regarding loans and withdrawals. A good plan may allow for loans in case of financial emergencies but discourages frequent withdrawals, which can deplete your retirement savings.

Rollover Options

It's important to know what options are available when you leave your job or retire. A good 401(k) plan will offer the ability to roll over your savings into another retirement account, such as an IRA, without penalties.

Regular Account Statements

A quality plan should provide you with regular statements and updates on your account, allowing you to track your progress and make adjustments as needed.

Accessibility and Online Services

The ability to access your account online, make changes, and monitor your investments easily is crucial. A user-friendly online platform can enhance the overall experience.

Plan Reputation and Provider

Research the reputation of the plan provider and their track record in managing 401(k) accounts. A well-known and reputable provider often indicates a better plan.

Legal Protections

Ensure that your 401(k) plan is covered by the Employee Retirement Income Security Act (ERISA), which provides certain legal protections for retirement plan participants.

Compliance with Laws and Regulations

A good plan should be in compliance with all applicable laws and regulations, including the Employee Retirement Income Security Act (ERISA) and IRS rules.

Available at Amazon.com:

Lifecycle Investing: A New, Safe, and Audacious Way to Improve the Performance of Your Retirement Portfolio

Worry-Free Investing: A Safe Approach to Achieving Your Lifetime Financial Goals

Spend 'Til the End: The Revolutionary Guide to Raising Your Living Standard--Today and When You Retire

The Hard Times Guide to Retirement Security: Practical Strategies for Money, Work, and Living

 

Personal Finance - How to Tell if You Have a Good 401k Plan

© U.S. News & World Report

Wealth & Finance ...

CAREERS | INVESTING | PERSONAL FINANCE | REAL ESTATE