401(k) Plans -What You Need to Know
Participating in a 401(k) plan can be one of the best personal financial planning decisions that you can make. However, there are some things about 401(k) plans that you need to know. This section is a resource to help you understand how most 401(k) plans work and to answer some frequently asked questions.
What is the Plan Document?
401(k) plans are governed by what’s known as a ‘Plan Document’. This document establishes the rules for how the plan operates and is administered. Plan Document provisions must comply with IRS and DOL regulations, and these two government organizations also require that the rules contained in the Plan Document be upheld by your employer and any of the plan’s service providers. Your employer decides what the provisions in the Plan Document are, and they are able to make certain changes called ‘amendments.’
Q: When will I be able to participate in my company’s 401(k) plan?
A: The point at which you may start participating in a 401(k) plan is known as eligibility, and once reaching it you may start deferring from your pay or receiving employer contributions. Different plans have different eligibility requirements, and those requirements must be satisfied before you can start participating in the plan. There are several government regulations in place that are designed to protect employees as they plan for retirement. These regulations state that the maximum eligibility requirement allowed is 1,000 hours of work (for the employer sponsoring the plan) within a 12-month period and attainment of 21 years of age. While some employers favor the maximum limit to discourage employees from leaving the company, others allow immediate eligibility. Don’t feel discouraged if your employer has one or the other; it’s simply a matter of which eligibility requirements are going to be the best fit for your employer’s business.
Q: How do I enroll in the plan now that I’m eligible?
A: First, login to your online account then update your deferral election percentage or amount and choose how you want that money to be invested by changing your investment elections. Next, update your email address, statement delivery preferences, and beneficiary information. Your deferral change will take affect on the next payroll cycle and the rest of your changes will take affect immediately.
We recommend that you at least make a deferral election and select an investment allocation. However, the more information you provide during the enrollment process, the better your 401(k) participation experience will be.
Q: What is vesting?
A: Vesting is the percentage of ownership you have accumulated on the money that your employer has deposited into your 401(k) account. Your ownership percentage increases each year that you attain the minimum number or working hours stated in the Plan Document.
Your plan’s vesting schedule will be outlined in the Plan Document. The tree types of vesting schedules are: immediate, graded, and cliff. The grids below will help give you an idea of what these different schedules might look like.
The schedule below is known as a 2-6 Graded Vesting Schedule:
The next schedule is knownas a 3-Year Cliff VestingSchedule:
Vesting schedules may be applied to any non-Safe Harbor employer contribution. Safe Harbor employer as well as all employee contributions are always 100% immediately vested.
Q: How can I withdrawal money from my 401(k) account?
A: To request a withdrawal from your account online, log in to your account and click the “Account Settings” menu option. Next, a sub-menu will appear with an option called “Online Distribution Request”. Click on this option and complete the steps that follow.
If you don’t see the ‘Online Distribution Request’ option, it’s because we have not received a date of termination from your employer and you will need to complete a paper form instead. Click on the link on the right side of this page to download the ‘Distribution Form.’
Keep in mind that 401(k) plans don’t work like personal bank accounts, so although you deposit money into the account from your pay, you cannot withdraw the money in the account at your own discretion. The IRS sets general rules for withdrawals, but your company’s plan may have its own set of rules within these guidelines that can further restrict withdrawals. So, just because you may hear that the IRS allows withdrawals based on certain criterion, this doesn’t mean that your plan utilizes that IRS provision.
There is one rule that is uniform across almost all plans; you may withdraw your entire account balance once you no longer work for the sponsoring employer. When this is the case, you may have the money paid directly to you, or you can roll it into another retirement account such as an IRA or a new employer’s 401(k) plan (assuming the plan you are rolling out of is considered a ‘qualified plan’). You will want to ask for guidance from your advisor or plan administrator when rolling your account over to another plan or IRA to prevent any potential unlawful transaction from occurring.
Because 401(k) plans come with special tax benefits, there are penalties for making withdrawals. For each withdrawal there will be a 20% federal tax withheld and possible additional state taxes. Furthermore, if the withdrawal is taken before the year in which you turn 59 ½, there will be an additional 10% penalty when you file your taxes for the year in which the withdrawal was issued.
Q: How do I take a loan out from my 401(k) account?
A: Since loans are not a requirement of 401(k) plans, there is a chance that your plan may not offer them. You can look at the Plan Document to see if loans are allowed, and if they are, what rule and restrictions apply to them.
The IRS states that the maximum amount that may be taken out for a loan is 50% of your vested account balance. Also, no more than 50% of your vested account balance may be outstanding in the form of a loan within a 12-month period. This means that if you were planning on paying off one 401(k) loan and immediately taking out another, the amount available to withdraw for the second loan will be limited to the 50% vested balance over the past 12 months rule.
Despite some of the restrictions, 401(k) loans have many advantages to conventional loans. Some of these advantages include:
- Not based on your credit history
- You keep the interest
- You structure the repayment term to fit your budget
Q: What kinds of fees are being charged to my 401(k) account?
A: 401(k) plan fees generally break out into three main service categories:
- Investment-Related Fees-these fees are charged by your plan’s advisor for providing investment advice to you and by mutual fund companies for the expenses related to maintaining the mutual fund that you’ve chosen to invest in.
- Administrative Fees-these fees are charged by the plan’s third-party administrator (TPA) for keeping the plan in compliance with government regulations. Some plan sponsors pay for these fees, while others allow them to be charged to the plan’s participants.
- Recordkeeping Fees-these fees are charged by your plan’s recordkeeper for conducting the account valuation work that goes into determining your account balance on a daily basis. Your recordkeeping fees also pay for your statements and online account access.
Q: How are my 401(k) contributions invested?
A: Typically, you choose how you want your 401(k) contributions to be invested when you first enroll in the 401(k) plan. These investment elections are saved in your online account until you make a change. If you did not make an election, then the plan has a default investment option that your 401(k) contributions will be invested in until you make an election.
Q: How do I change my 401(k) investment elections?
A: You can change your investment elections at any time in your online account. After logging in, you would select ‘Investment Tools’ in the top menu. Next, select the ‘Create Custom Allocation’ menu option. Now, enter your desired investment election percentages and click ‘Submit Investment Elections’ at the bottom of the page. The next page will ask you if you wish to ‘realign’ your account balance to your new investment elections or if you would like to only apply these to future incoming 401(k) contributions. Select the option you wish, and then you’re done.
Q: What are model portfolios?
A: Model portfolios are an investment option that automatically and strategically allocates your 401(k) contributions across a mix of mutual fund offerings in the plan. These models are designed to make proper diversification and risk exposure easy for all participants. Instead of having to determine which mutual funds and what percentages to invest in each one, model portfolios can easily do that for you by matching your risk tolerance with the most appropriate model portfolio.
Q: Where are my assets held in custody?
A: ERISA Partners uses Charles Schwab Bank as the custodian for all our plan’s assets. Your contributions are deducted from payroll each pay period and sent directly to the plan’s trust account at Charles Schwab Bank. Your money does not flow through any of ERISA Partners’ accounts. This strict model maintains financial control and assurance for our clients and interested parties.
Q: Where can I find performance information for the mutual funds listed in my account?
A: You may find performance information by clicking on the ‘Investment Tools’ tab at the top, then click ‘Investment Performance’. Use the scroll bar to scroll across and view all the performance data, or download it to an Excel spreadsheet by clicking the Excel icon on the screen. Links have also been provided to the prospectus for each fund.
You may designate a beneficiary to your 401(k) account online. Simply log in, and click the Account Settings link in the main menu. Next, click the Beneficiaries link in the sub menu that appeared below the main menu. Follow the steps and your beneficiary designation information will be stored in the event that it is needed. You may make changes to your beneficiaries in your online account if you change your mind later.
Typically, the default beneficiary to your account is your spouse. However, if you wish to designate some one other than your spouse, spousal consent is required to be documented. Please obtain a paper copy of a beneficiary form from your employer if you plan to elect someone other than your spouse. Complete the form and return it to your employer so they may keep a copy on file.
If you have money in an account with a former employer’s qualified retirement plan and would like to roll it into the account you have with ERISA Partners, please send an email to firstname.lastname@example.org or call 1.800.858.6989 for check and mailing instructions.