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Things You Should Know About Your 401(k)

Photo by Torley

Retirement is something that working people look forward to. Indeed, many of us dream of retiring as early as possible so as to enjoy our lives without working our bums off. In the United States, the majority of workers prepare for their retirement by putting money into 401(k) plans while they are still part of the workforce. However, it cannot be said that the average person investing in a 401(k) plan knows everything about it. Let me ask you, how much do you know about your 401(k) plan?

Perhaps you may say not much. Maybe you’re thinking – pretty much, actually. Whichever the case, I will not assume that you know all that you need to know about your 401(k) plan. Let me go one step further and outline some important facts that you need to know about 401(k) plans. Who knows, you might pick up a useful thing or two?

401(k) in General
  1. Your company match is NOT always guaranteed. There are companies that provide what is called company match when you invest money in your 401(k). The amount that they match depends on the particular setup, but the idea is that your company will ‘match’ a certain amount of what you put towards your retirement savings. The thing is this: some companies may require that you stay with them for a specific period, otherwise, you will not be able to actually receive the amount pledged by the company. You ought to be certain about the percentage and the required length of stay in the company if you really want to receive the company match.
  2. You might be paying more than you ought to in fees and other charges. If you do not pay attention to the details of your 401(k) plan, you might end up shouldering certain fees such as sales charges for buying mutual funds. This usually happens with small companies, so you might want to look into the breakdown. Where does your money go? If you do find out that you are paying extra charges, talk to your employer and negotiate a switch to a 401(k) provider that does not apply these charges. (Yes, they do exist.)
  3. Your portfolio might not be diversified enough. Some individuals do not really take a close look at their portfolio, leaving the decisions to their advisers/consultants. If I were you, I’d make sure that my investment is diverse enough to suit my needs. Young professionals might want to take a little bit more risk in order to enjoy more gain. You also need to make sure that majority of your investment is not stuck in one stock.
  4. Having too many choices does not necessarily translate into ‘better.’ This is the opposite of the previous point. Some 401(k) plans have a lot of choices as to what you can invest in. For the average person, too many choices might prove to be confusing. Instead of looking for the plan that has the highest number of choices, look for quality.
  5. You can take out loans on your 401(k) but this might have repercussions you may not be aware of. For instance, if you leave your company for one reason or another and you have a 401(k) loan, you might have to pay the whole loan amount immediately. If you get laid off or fired, paying off that loan may be the last thing that you need!
401(k) Loans

Speaking of loans, here are some facts about 401(k) loans.

  1. There is no credit check required. This is a boon for many consumers, as credit checks are notoriously difficult. If you take out a 401(k) loan, this is one step that you do not have to worry about.
  2. There is a limit as to how much you can borrow. In general, this limit is either half of your retirement plan balance or $50,000. If you are borrowing to purchase a home, you will have more than 5 years to pay the loan off. Otherwise, in general, you’ll have to pay the loan off in less than 5 years.
  3. Borrowing from your 401(k) plan is akin to lost income. This is because of the fact that you are actually taking money which will otherwise be invested in your behalf. Obviously, if you take out that money from your 401(k) plan, it will not be earning. Still, on the upside, each loan payment you make goes back to your retirement plan.

There you have it – some tidbits of information on your 401(k) plan and 401(k) loans. Make sure that you do look into the details carefully and that you do not take anything for granted. After all, your 401(k) investment holds your financial future, and you want that to be as secure as possible, don’t you?

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