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401k Plan Most Frequently Asked Participant Questions

401k Plan Most Frequently Asked Participant Questions

For 40 years, we have worked with employers and educated retirement plan participants about plan benefits. We know 401k plans can seem complicated, and participants may have difficulties understanding the rules. To help, we answer the 401k plan questions frequently asked by retirement plan participants.

1. How much money can I put into my 401k?

The maximum contribution amount is set by law and annually adjusted for inflation. Participants 50 years of age and older may also make additional catch-up contributions. The catch-up limit is also set by law and annually adjusted for inflation. We have published maximum limits for the current year and recent history.

2. How does contributing to my 401k plan save me money?

By participating in a 401k plan, you can save money on income taxes. Consider this example: Based on TaxACT, in 2017 a single person earning $50,000 per year pays $8,238 in federal income tax, or 16.48% of income. By contributing 10% of pre-tax earnings to a 401k plan, the person's taxable income is reduced by $5,000. In this example, by simply saving for retirement, the person saves $1,250 per year in federal income taxes.

3. How much money should I put into my 401k plan each year?

Many experts suggest contributing at least as much as your employer's matching contribution. Example - suppose your employer matches $0.25 per dollar up to 8% of your pay. To receive the maximum benefit, you should contribute at least 8% of your pay. Our experience suggests that workers should save at least 15% of their compensation toward retirement. In most plans, employers will fund some of the retirement savings for their workforce. Generally, people who start saving later in their careers may need to save more.

4. How much money will Social Security provide?

The Social Security Administration offers several Benefit Calculators on its website, which you can use to calculate your estimated Social Security Benefit.

5. How should I invest my 401k account?

When making investment decisions, participants should carefully consider their unique circumstances, retirement income objectives, investment fees, and risk tolerance. A well-diversified and properly asset-allocated portfolio can help reduce risk and position investors for more favorable outcomes. Many financial professionals can help you create a suitable portfolio for your situation. Some 401(k) plans do not permit participants to make investment decisions. Instead, investments decisions are made by a pension committee or by contracted investment managers. Other plans offer participants a menu of investment choices.

6. Why does my employer not provide a 401k match?

Budgeting for a 401k plan match may not fit into the objectives of some employers. In lieu of a match, many employers might fund 'profit sharing', 'discretionary', or 'non-elective' contributions to your account. Generally, employers are not required to make additional contributions to 401k plans.

7. Is it legal for my employer to move my 401k to different investments and change investment managers?

It is permissible. Your employer is responsible for the suitability of investments offered in your 401k retirement plan.

8. What can I do if I do not like my 401k plan investments options?

It is your employer's responsibility to gauge investment suitability; so many employers have structured processes to evaluate investments. Simply because you do not like an investment does not mean it is unsuitable. If you believe an investment is inadequate, talk with your employer's human resources representative or your 401k plan investment advisor.

9. Can I withdraw money from my 401k if I am still employed?

It depends on the provisions of your plan. Many plans offer participant loans and financial hardship withdrawal options. To quality for a financial hardship withdrawal, you must meet certain requirements, the most common of which include:

  • preventing foreclosure or eviction from your principal residence
  • paying for unreimbursed medical expenses
  • paying for college education for you or your dependents

A financial hardship withdrawal will require you to pay a 10% tax penalty, in addition to current income taxes, as applicable. Moreover, if you take a financial hardship withdrawal, you cannot contribute to your 401(k) account for 6-months.

If your plan allows participant loans, you may generally borrow the lesser of $50,000 or 1/2 of your account balance. However, the consequences of 401k participant loans are numerous:

  • once a plan disburses loan proceeds, you are are out of the market and forego potential upside investment returns
  • you repay loans on an after-tax basis, frequently through payroll deductions
  • loan interest is not tax-deductible, as it is considered ordinary consumer debt
  • generally, if you terminate employment prior to repaying your loan, the balance becomes immediately due, or the loan is deemed a taxable distribution with a 10% penalty, if you are under age 59 1/2.

In view of the drawbacks, you should consider one of these options only as a final resort, after exhausting all other means of financial assistance.

10. Can I stop contributing to my 401k plan if I cannot afford it?

Most 401k plans allow you to modify or stop your contributions at any time, but the rules vary. Your employer should provide a summary plan description, which summarizes the major rules and provisions of your plan. The summary plan description will tell you when your contributions may be started, increased, decreased, or stopped.

11. If I stop working for my employer, when can I get my 401k account?

When you terminate employment, you are eligible to receive a distribution from your 401k plan. The length of time to disburse your account will vary based on:

  1. the next plan valuation date. Your account cannot be distributed until the plan determines participant account balances. Plans may be valued daily, monthly, quarterly, or annually.
  2. the plan provisions. Most plans permit a distribution as soon as administratively feasible. However, in certain instances, plans may specify a time frame or require that you wait until retirement to receive a distribution.
  3. your account's investments. Most investments can be redeemed and converted to cash very quickly. Some investments, such as hedge funds or stable value funds, may impose redemption restrictions, which preclude the plan from redeeming your shares for several weeks or months. Other investments, such as real estate, may take much longer to liquidate.
  4. paperwork processing.

12. What should I do with my 401k plan distribution?

Generally, after you leave an employer, taking a rollover of your 401k to an Individual Retirement Account (IRA) or another employer's workplace plan is advisable. This approach helps preserve some of the favorable tax benefits of your former employer's 401k plan. Our clients' participants can conveniently take an IRA rollover distribution through an integrated process with GROUPIRA. If you are interested, simply look for this option in your retirement plan distribution kit. Alternatively, most banks, credit unions, and brokerage firms offer IRA products to retail investors.

13. Why was part of my 401k distribution forfeited?

Forfeitures apply if your account is not 100% vested. Vesting is a technical term referring to your 401k account ownership. You always own 100% of money you put into the plan, but participants may not immediately own 100% of employer contributions (examples: employer match, employer profit sharing, employer discretionary, etc.). In most instances, vesting increases with each additional year of employment. Many employers maintain retirement plans to encourage employee retention, so rewarding longer-term employees with greater ownership of their 401k account balances helps satisfy this objective. Vesting schedules vary, so review your summary plan description for information about your 401k plan's vesting rules.

14. Why did my employer terminate my 401k plan and what happens to my account?

Employers provide retirement plans for different reasons. Sometimes, business or economic circumstances change, and it is no longer possible for an employer to offer a retirement benefit plan. When an employer terminates a 401k plan, participants become 100% vested in their account balances. In addition, participants can take a distribution from the plan and roll their balance into an Individual Retirement Account (IRA) or, subject to potential penalties and taxes, receive a cash disbursement from the plan.


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Spectrum Consultants is a multidisciplinary B2B consulting firm, which specializes in 401k administration, benefit plan outsourcing, business solutions, and management consulting.

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