Not fully understanding the ins and outs of your (401K) plan could cost you thousands of dollars over time (money you could be spending in retirement).

I don’t know about you, but I’d like to make and keep as much money in my retirement account as possible.

If that’s the case, here are 5 things you should know about your 401(k) plan:

1. Employer Match

92 percent of employers with 401(k) plans match employees' 401(k) contributions. That means your employer will match every dollar you contribute to your 401(k) (up to a certain percentage).

I.e. if you contribute $1 to your 401(k) the company will also contribute $1.

But not every employer's match is the same. The most common is a dollar-for-dollar match on the first 3% and then 50 cents on the dollar on the next 2%.

So if you contribute 5% of your income, you get another 4% from your employer. 

You should always contribute up to the maximum match amount because it’s a 100% return on your investment and essentially free money.

2. Vesting Period

Vesting refers to the percentage of employer contributions that you own.

Contributions you make to your 401(k) are always 100% yours (in other words, fully vested).

But contributions your employer makes through an employer match might not be yours until you’ve been with the company long enough. This is called a vesting schedule.

Here are the 3 most popular types of vesting schedules:

• Immediate Vesting: You have full ownership of your employer's contributions as soon as they hit your account.

• Graded vesting: A percentage of your employer’s contributions are yours over time. E.g. 20% of your employer's matching contributions are vested after two years, 60% after four years, and 100% after six years.

• Cliff vesting: You have full ownership of the employer's contributions on a specified date. I.e. you might become fully vested 3 years after your hire date. 

It’s important to understand your company’s vesting schedule so you know when those employer contributions are 100% yours.

3. Roth or Traditional

A Roth 401(k) is funded with after-tax dollars that you can withdraw tax-free once you reach retirement age (59 ½).

A traditional 401(k) allows you to make contributions before taxes, but you'll pay income tax when you withdraw in retirement (59 ½).

There is a strategy on which one to contribute to and when (but that’s for another post). It’s good to know which plan you are contributing to so you have a general idea of what’s in store for when you retire.

4. Investment Options

Look at the investment options your employer offers within your 401(k). 

Most of your options will be mutual funds or ETFs like…International

• Target-date

• Real estate

• Large-cap

• Small-cap

• Bonds

Do some research and make sure you invest in funds that align with your risk tolerance and retirement goals.

5. Fees

All mutual funds and ETFs are going to have a “management fee.” How much they charge will vary from fund to fund. 

Look for funds with the lowest fees ( < .20). 

You can’t control how the fund performs, but you can control how much you pay in fees.

Conclusion

Do yourself a favor and get familiar with your 401(k) plan. Your future self will thank you.

That’s all for now.

Darrell