If you are like 80% of U.S. workers (89% of those in companies with 500+ employees), you have access to a defined-contribution plan, such as a 401(k). Because each plan is unique, it's important to find out the plan's details and your options. Here are five questions you should ask about your company's 401(k) plan.

1. Does the company match my contributions?

This is perhaps the most important question to ask because a company match can significantly increase the value of your retirement account. It's common for employers to match a percentage of your contribution. For example, you make $50,000 a year and contribute 5% of your salary ($2,500). Your company matches 50% of your contribution, which adds $1,250 to your account. The employer contribution may be limited by the plan (for example, the plan may match 50% up to 4% of your salary), or by your annual contribution limit as set by the IRS. If your company does match, try to contribute at least up to the maximum they are willing to match.

2. What are my investment options?

Plans will usually allow you to choose from a variety of investments, such as mutual funds, stocks (this can include your company’s stock), bonds and guaranteed investment contracts (GICs). If you don’t like the investment options offered by your employer, you may be able to transfer a percentage of your plan into another retirement account. This is known as a partial rollover.

Many people invest more aggressively when they are younger (and are able to recover from losses), then make more conservative investments as they approach retirement. This means you will likely change your allocations over time. Most plans let you make changes at will, however, some restrict changes to only once per month or quarter.

3. Which investment option has the lowest expense ratio?

Many investments, including mutual funds and exchange-traded funds (ETFs), charge shareholders an expense ratio to cover the fund’s total annual operating expenses. Expressed as a percentage of a fund’s average net assets, the expense ratio includes administrative, compliance, distribution, management, marketing, shareholder services and recordkeeping fees, as well as other operational costs. The expense ratio directly reduces shareholder returns, thus lowering the value of your investment. Don't assume an investment with the highest return is automatically the best choice. A lower-returning investment with a smaller expense ratio might make you more money in the long run.

4. When do I become vested?

The vested portion of your 401(k) is the part that is yours to keep, even if you leave your job. Any money that you contribute is always 100% vested. The contributions made by your company, however, will be subject to a vesting requirement. There are two types of vesting schedules: graded and cliff. With graded vesting, funds vest over time. For example, you may be 25% vested after your first year, 50% vested the next year, and so forth until you are fully vested. With cliff vesting, the employer contribution is 0% vested until a certain point at which it becomes 100% vested after a specified amount of time on the job (such as after two years). Either way, once you become fully vested, all the money in the plan (your contributions plus your employer’s) is yours and you can take it with you if you change jobs or retire.

5. When can I withdraw my money?

In general, if you make a withdrawal before you are age 59.5, you have to pay a 10% penalty tax on the distribution. In cases of hardship, you may not have to pay the penalty. These hardship exemptions can include:

  • Suffering a disability
  • Death, and the distribution is made to a beneficiary
  • Certain medical expenses
  • Buying your first home
  • Paying for college (for you, your spouse or children)
  • Avoiding foreclosure or eviction
  • Burial or funeral expenses
  • Certain home repairs

Once you turn 70.5, you need to make required minimum distributions (RMDs). In general, you have to start withdrawing money by April 1 of the year following the year that you turn 70.5. Your age (and life expectancy) and account value determine the required minimum distribution.

The Bottom Line

Choosing a 401(k) plan can seem overwhelming. As a result, many workers eligible to participate in these employer-sponsored retirement plans delay – or avoid – signing up. Understanding these five questions will help clarify the plan's details and your options. If the materials you get aren't clear, ask your human resources or benefits coordinator to answer any questions you have about your company's 401(k) plan. If you're already signed up, be sure to track your investment options and reallocate as necessary.

Related Articles
  1. Retirement

    Should You Roll Over Your 401(k)?

    Before moving your retirement funds into another account, consider your options.
  2. Retirement

    When a 401(k) Hardship Withdrawal Makes Sense

    If you've exhausted all other avenues, there are ways to withdraw funds before age 59½ – sometimes without the 10% penalty that's usually due.
  3. Retirement

    The Hidden Fees In 401(k)s

    Learn about the conspicuously disclosed fees that lurk within your 401(k) investments.
  4. Savings

    Learn A Lot More About Your 401(k) Fees

    Beginning in April, all 401k fees being passed on to employees must be disclosed in an easy-to-read format.
  5. Savings

    Reasons To Boost Your 401(k) Contributions

    We look at tax rates, market factors, Social Security and more to see why you should be adding extra to your 401(k).
  6. Savings

    401(k) Planning: How Much Should You Be Saving?

    We look at how much you should contribute to your 401(k) and when. And also, how much you should have in your account during certain times in your life.
  7. Retirement

    How To Get The Most Out Of A 401(k) Program

    Saving for retirement is important. We tell you about six ways to take advantage of your 401(k) and other retirement plans.
  8. Retirement

    6 Problems With 401k Plans

    If you pay attention to the problems here, you will be able to avoid the negative effects and meet your retirement goals.
  9. Retirement

    The Best 401(k) Moves Right Now

    Whether you've been out or in the market lately, the health of your 401(k) is vital.
  10. Retirement

    Is Your 401(k) On Track?

    Small adjustments can have a significant impact on your returns. Learn what to watch for.
  1. Can a 401(k) be taken in bankruptcy?

    The two most common types of bankruptcy available to consumers are Chapter 7 and Chapter 13. Whether you file a Chapter 7 ... Read Full Answer >>
  2. When can catch-up contributions start?

    Most qualified retirement plans such as 401(k), 403(b) and SIMPLE 401(k) plans, as well as individual retirement accounts ... Read Full Answer >>
  3. Who can make catch-up contributions?

    Most common retirement plans such as 401(k) and 403(b) plans, as well as individual retirement accounts (IRAs) allow you ... Read Full Answer >>
  4. Can you have both a 401(k) and an IRA?

    Investors can have both a 401(k) and an individual retirement account (IRA) at the same time, and it is quite common to have ... Read Full Answer >>
  5. Are 401(k) contributions tax deductible?

    All contributions to qualified retirement plans such as 401(k)s reduce taxable income, which lowers the total taxes owed. ... Read Full Answer >>
  6. Are 401(k) rollovers taxable?

    401(k) rollovers are generally not taxable as long as the money goes into another qualifying plan, an individual retirement ... Read Full Answer >>

You May Also Like

Trading Center