Should you participate in your company’s 401(k)?
Changing jobs often comes with new benefits, pay structure and a different 401(k) plan. Whether or not to join your new company's retirement plan is an important decision that you may have to make several times over the course of your working life.
Here are a few factors you should consider when judging a new 401(k) plan:
Fees – Some employer-sponsored retirement plans charge extra fees to cover administrative expenses. This may not be an issue for employees at larger corporations, as they are able to negotiate lower fees. Smaller firms, however, often do not have this advantage. Retirement plan providers are required by law to disclose information regarding additional costs, so be sure to read your plan's summary for more details.
Investment options – Does your employer offer a diverse and solid group of stocks in its plan? Many financial advisors recommend that you consider the following when reviewing your plan's investment options:
- Expense ratio – If the plan costs more to maintain than the assets in it are worth, you may want to pass on this 401(k).
- Manager start date – 401(k)s often contain mutual funds. You should make sure that they have managers with a tenure of at least five years.
- Returns history – Look at your retirement plan's five and 10-year return ranking compared with similar funds in its category. The plan doesn't have to be at the top of the list, but it should be in the top half.
Match contribution – If your employer matches any part of your contribution, you will want to confirm the stipulations of this program with your benefits manager. Some companies don't begin to match until after the employee has been working there for a set period of time – usually between six months and one year. There may also be a certain percentange of your income that you will need to deduct to qualify for your company's retirement plan.
Roth option – Consider taking a Roth 401(k) option if your company offers it. You will pay taxes on contributions, but you will be able to make tax-free withdrawals. This may be a good idea if you anticipate that your future tax rate will be higher than your current one. As an alternative, you could put your money in a Roth IRA if your company doesn't offer the similar 401(k) program.
Even if your employer's 401(k) is less than ideal, it may be the best option for you especially if you are a high-income earner. You should try to take advantage of every tax-deferred savings plan that you can.
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