5 Questions to Ask When Planning Your 401(K)

5 Questions to Ask When Planning Your 401(K)

September 14, 2023

When was the last time you took steps to optimize your 401k?

If it has been a while, you are not alone. Research indicates that only one in three Americans utilize employer-sponsored 401k retirement accounts; even those contributing may not be taking full advantage of potential benefits[i].

Here are five questions to ask about 401k planning.

  1. How are 401k Funds Invested?

How does your company invest employee retirement funds? Many 401k plans allow participants to choose from a range of investment options, such as mutual funds, stocks, or bonds. Proper asset allocation helps ensure diversification. Aim for a balanced mix over a range of investment vehicles.

For younger investors, a more aggressive approach may make sense, as they've got more time to recover from losses. A more conservative approach may be beneficial for older investors who are nearer retirement. Either way, your investments should align with your risk tolerance and time horizon.

  1. Does My Employer Match Contributions?

Many companies will match the contributions you make to your 401k. Usually, the match is a percentage of your contribution, but some employers match employee contributions dollar-for-dollar.

Find out your company's policy and take full advantage of it. If you don't, it's like you're throwing away free money. Plus, thanks to the power of compounding interest, an employer match may help your retirement savings grow exponentially.

  1. What About the Expense Ratio?

Investment vehicles, such as mutual funds often charge expense ratios. This cost is usually based on a percentage of the fund's net assets, and passed along to shareholders.

Expense ratios cover operational costs such as:

  • Administration
  • Management
  • Marketing
  • Compliance
  • Record-keeping
  • Distribution

Expense ratios cut into your returns, so look for funds with low ratios. Keep in mind that expense ratios affect returns over the long term; even if an investment has high returns, a high expense ratio can negate it.

  1. When Am I Fully Vested?

The contributions you make to your 401k are fully vested. That means you can keep them even if you leave your job.

But the contributions your employer makes may be a different story. Often, you'll have to work for the employer for a certain amount of time before you can take those funds with you. This system is known as a "cliff" vesting schedule.

Some employers use a "graded" vesting schedule, in which a certain percentage becomes available after specified time periods pass. For instance, you may be 50% vested after three years on the job and 100% vested after five years[ii].

  1. When Can I Receive Distributions?

Usually, you can start withdrawing from your 401k without penalty once you reach age 59 1/2. If you withdraw before that age, you have to pay an additional 10 percent in income taxes as a penalty[iii]. In some instances of hardship, the IRS may waive the penalty.

After you reach age 73, you must take a required minimum distribution[iv]. Your age and account value will determine the minimum amount you must withdraw.

Asking these questions can help you make the most of your 401k.


Important Disclosures:

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial professional prior to investing.

Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments.

Asset allocation does not ensure a profit or protect against a loss.

There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.

All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.

This article was prepared by WriterAccess.

LPL Tracking #1-05319556




[iii]Hardships, Early Withdrawals and Loans | Internal Revenue Service (irs.gov)

[iv]Retirement Topics — Required Minimum Distributions (RMDs) | Internal Revenue Service (irs.gov)