What to Look for in a 401K Plan

When you're offered a great new job, one of the first things you should consider are the benefits. What's being offered to you, beyond a salary? Many people focus only on the money that they will be paid every week or two weeks, and they fail to see the bigger picture. That picture must include benefits such as health insurance and a 401(k) plan, because protecting your health and saving for retirement are becoming more and more important in today's society. As people live longer, they need more money for their golden years, and that's where a good 401(k) plan comes in.

So, what can you expect in a 401(k)? There are some things that are standard, and others that may be related to a specific company or job - you may not get them just anywhere. As for what you can expect with any 401(k) plan, your plan should include the following:

  1. Information on whether contributions are pre- or post-tax.
  2. Details of restrictions on the removal of funds.
  3. Information as to whether employees can take out loans against their plan.
  4. How and when to begin withdrawing funds after retirement.
  5. Whether the employer matches employee contributions and at what percentage.

A 401(k) plan that has employer-matched contributions is considered to be better - all other things being equal - because it ultimately puts more money into the employee's 401(k). That money can be used in retirement, and is "free" money in the sense that the employee did not have to place that money into his or her 401(k) account. The employer-contributed money earns interest just like the contributions that are made by the employee, and when the money is invested properly it can add up to a significant amount that can be used in retirement.

When an employer offers a 401(k) plan, one of the guidelines for that plan is that there is a maximum amount that the employee can contribute each pay period. Usually, this is capped at 10%. Many employees do not contribute to their 401(k) at that level, but those who make the maximum contributions to their 401(k)s through their working lives typically have much more financial freedom when they retire. Employers often do not match the employee contributions at the highest level, because they simply cannot afford to do so. However, many employers will match contributions up to six percent - which is still sizeable when it comes to adding up to a strong retirement cushion.

Upon reaching 70 1/2 years of age, a retired employee must begin withdrawing money from his or her 401(k) plan. If the employee has not retired by that age, he or she does not have to begin withdrawing money - but those withdrawals will need to start on April 1st of the calendar year immediately following the year in which the employee retires. A minimum amount must be withdrawn, but it is also possible to withdraw more than the minimum if that is what the retired employee desires.

Most 401(k) plans are very similar to one another, and are not controlled specifically by the company which offers them. Because of that, employees can generally feel safe financially when they put their money into a 401(k). Still, it is a good idea to learn all you can about a company and the retirement plan(s) that company offers, in order to lower financial risk. Some companies in the past have gotten into trouble - and caused financial harm to employees - because they did not invest their 401(k) money correctly or put all of the employees' retirement fund money into their own stock. Most companies like this can be discovered and avoided.