How to Rate Your 401(k) – 6 Options to Consider

Daniel Penzing
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Contribution Limits

Company Match

If your company matches your contributions, you can give yourself an immediate pay raise … right now! But it’s wiser to take it slow, because 401(k) match programs often have strings attached. You may only be able to get the maximum matching contribution–typically 50 cents for every dollar you save, up to a specified percentage of your salary – if you contribute at least 6 percent of your paycheck. But that’s not all: Salaried workers often have to earn a certain number of hours to be eligible for the match, and those who opt for the 401(k) in lieu of a bonus or incentive pay are typically ineligible for matching contributions.

Vesting Requirements

When you don’t contribute to your 401(k) for more than a couple of years, your employer might not offer you matching contributions. It’s an easy way they save cash.

However, even when making your retirement contributions, if you leave your company too soon, you may not have any say in how your employee contribution is invested. You lose control of your investment. Therefore, it’s crucial that you stay invested in your 401(k) for a few years to maintain your vested interest in it.

In fact, even if you’ve accumulated as much as a million in the plan, you might not be able to access your money while you have an unvested account.

The longer you stay, the more control you have.

Investment Diversification

One of the key factors to consider when it comes to rate your 401(k) is investment diversification. This may seem like an obvious point, but the key is to understand what you want to achieve and how diversification can help you achieve that goal.

When it comes to investment diversification, you have to ask yourself about your risk tolerance… do you want to be more aggressive and take on some risk or are you more conservative and willing to settle for a more moderate or traditional investment portfolio.

All investments carry some level of risk and some riskier investments may be more rewarding. This is why you need to have a proper risk and return strategy to assist with how you should invest. When it comes to rating your 401(k), you may want to consider some of these riskier, more aggressive investment opportunities, or you may want to opt for more conservative ones that play it safe.

In the end, it all depends on your own personal outlook, but one of the primary factors to consider is diversification.

Fees and Account Cost

No matter what type of investment you choose, you’re going to pay fees. This includes the 401(k) plans that your employer sets up for you.

Unfortunately, though, most people don’t pay enough attention to these fees because they’re scared off by some of the terminology. Or they simply don’t see the value of doing the research to figure out whether they’re getting a good deal or not.

Here’s the thing, banks and financial institutions make more money by charging higher fees. They’re not necessarily looking out for your best interest. And if there are other options available to you, why wouldn’t you choose them?

The following are different ways to calculate your 401(k) fees. Each way can help you gain a different perspective on your 401(k) fees.

When you start calculating your fees, take note of the assets you’re invested in. You can find this information in the frequently asked questions (FAQ) section of your 401(k) plan.

A Roth 401(k) Option

A Roth 401(k) option allows you to contribute post-tax dollars into the account. This contribution is made with after-tax funds, but no tax is due on the earnings when you withdraw from the account. A Roth 401(k) option allows for retirement investing without an up-front tax payment.

While many people see this as a tax benefit, they may want to focus more on the Roth 401(k) option’s flexibility. One benefit is that you can choose between tax-deferred saving or post-tax saving for retirement. This means that you have the option of investing the earnings in a choice of a traditional 401(k) plan or a Roth 401(k) account.

Another benefit that many people miss is that a Roth 401(k) option can usually be rolled over into a Roth IRA.

Another word of advice for retirees is that if they are not required to take minimum distributions yet, the Roth 401(k) option may not be the best option.

Money in a Roth 401(k) option is generally more flexible than money in a traditional 401(k) option since it is easier to withdraw and roll over to other retirement accounts.

What to Do if Your 401(k) Isn't a Good One

You're saving for retirement. You've been putting money into your 401(k) plan for years. So why do you still feel as if you're falling short?

The reason is simple: Your 401(k) probably stinks. In a big way. It's a lousy 401(k) plan.

It could have one or more of a variety of problems, but most commonly:

The fees are way too high, and they go up with every contribution you make.

There are fewer investment options than just about anywhere else.

A high percentage of your options are actively managed funds.

The fees could be higher than your plan provider officially reports.

Any or all of these mean your plan is hurting and you're losing money.

If you believe your 401(k) isn't helping you in your retirement endeavors, here are six steps you can take to make it a better one.

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