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What are Employer Retirement Plans

Have a 401k? Ask these questions!


Back in our grandparents’ days, many people would work for the same company for about 25-35 years. Retiring from such companies came with the assurance of a pension plan, providing retirees with a predictable monthly income based on their years of service. Nowadays we’ve shifted to the modern evolution of the traditional pension plan that we commonly know as the 401(k) plan. This modern approach grants employees more control over their retirement savings and is more cost-effective for the employers. However, let’s skip the history of the 401(k)s and concentrate on the essential questions you should be asking if you currently have one or are planning to start one.

The questions vary depending on various factors including your financial plan, goals, and life cycle stage. Therefore, consider this as a simplified guide based on the three common life cycle stages. It is crucial to consult a financial professional before making any changes in decisions to your financial and investment strategies.

While some questions overlap across the stages, they offer unique insights from different angles. For instance, understanding costs and comprehending the matching contribution policy are crucial in all phases. Let’s explore each stage separately, beginning with the fundamentals.


The fundamentals, aka the basics: 

  1. Ensure beneficiary information in the plan is current and accurate. It’s good habit to check these on a yearly basis, as life does change. This ensures that your assets go to the intended recipients.
  1. Understand the costs associated with your plan. This will help you compare and evaluate future alternatives. If you have older 401(k) accounts or IRA’s, use cost analysis in your consideration to make financially sound decisions of consolidating assets in your current 401(k) plan.
  1. Find out if there is a Roth option. We will discuss its significance in each life stage.
  1. Explore the possibility of taking a loan against your 401(k) and familiarize yourself with the terms. This can enhance liquidity needs of your financial plan and gives greater access to your net worth.
  1. Understand what is the company matching policy or revenue sharing plan if any. This can impact how much you contribute to the 401(k).
  1. Learn about the vesting schedule; many companies use this to retain talent. If you plan to switch jobs and your company’s profit sharing takes time to vest, consider when those assets will become yours. Leaving before vesting means forfeiting those assets.
  1. Understand your investment options and how to adjust them. Some plans offer advised and managed strategies, which may or may not be worth the additional cost. Your risk tolerance may change over time, so periodically review, and adjust your investment strategy according to your up-to-date goals.


The Accumulation stage:

In this stage you may be just starting your career or have more than 20 years to retirement. This stage is also known as the high growth stage. The more you know now the more suited you will be to manage and make decision on your 401K through growth within your profession and career.

  1. Know the basics! Begin with the fundamentals mentioned earlier.
  1. Having a Roth option in the 401(k) can help you accumulate tax free distribution in the future. Making Roth contributions could make sense early on if you are starting your career. As your tax brackets will most likely increase as your income grows. Dollars invested today at a lower tax bracket will grow tax free and be distributed tax free including the gains. So, your total tax cost per dollar today may be a cheaper cost in this method. Again, entirely dependent on your individual long term tax strategy.
  1. Knowing the terms of taking a loan against your 401(k) can provide financial flexibility and give you options when making strategic investment moves. Say you need an additional 10K to qualify for a needed loan, or to get access to an investment that is time sensitive. You can access the funds through the 401k and then repay them on your next bonus or through future payments into the plan.
  1. Understanding the investment option and how active management strategies work versus passive strategies that track the index. In the early stages of accumulation, you have time on your side. Understanding how the cost of these various investments affects your returns over a longer period can save or even add a little more than a few bucks. It’s important that the investments in the 401k match your financial planning goals.


Preservation Stage:

This stage typically applies to mid to late-career individuals. You have accumulated assets, and maybe even in a higher tax bracket than when you were a few years ago. The thought of retirement is becoming more real, and the 401(k) is one of your primary sources.

  1. Know the basics! Begin with the fundamentals mentioned earlier.
  1. Strategic Roth Conversions is the most under-utilized strategy that I have seen in my experience. Consider the strategic use of Roth conversions of part of your long-term tax planning strategy especially during market downturns. This is a great time to engage both your financial planner and CPA. Understanding conversion triggers and building those into your plan will give you a proactive approach to paying Uncle Sam a little less of your hard-earned income.
  1. Understanding how to take a loan again your 401(k) or access the funds inside the 401(k) can help you plan for emergencies in times of unexpected financial needs.
  1. Risk tolerance and investment allocation. Preservation at this stage shouldn’t be overlooked. Although some of the portfolio should still have growth exposure but balance and investment towards a goal should be key. Make sure to align your risk strategy with your current plan objectives.
  1. You might be in one of the highest income brackets of your life at this stage. With a holistic long-term tax strategy, a 401(k) plan can be pivotal to lowering tax exposure. Another great time to ensure your Financial Planner and CPA are working homogenously.


Transfer or Retirement stage:

  1. If your plan offers an annuitization option, conduct a cost-benefit analysis to determine its suitability for your retirement goals.
  1. Adjusting the investment strategy to meet distribution requirements while ensuring longevity of the assets.
  1. Building and developing a comprehensive distribution strategy to minimize tax penalties. Particularly in relation to Medicare costs. Strategic Roth conversion strategies could be implemented in this area as well to manage long term retirement tax planning.
  1. 401(k) or IRA, evaluating whether it makes sense to leave your funds in the 401(k) or roll over into a self-managed Individual Retirement Account (IRA).
  1. Preparing for required minimum distributions (RMDs), which are mandatory withdrawals from retirement accounts after a certain age.
  1. Consider your estate strategy, including how assets will be distributed to heirs, whether through direct beneficiaries or strategic trusts. Understand the tax implications of inheriting a 401(k).


In summary,  managing your 401(k) effectively is crucial for securing your financial future. Whether you’re just starting out or approaching retirement, asking the right questions, and making informed decisions about your plan can have a significant impact on your financial health. Collaborating with various financial professionals is essential at every stage to optimize your retirement strategy. By staying proactive and informed, you can maximize the benefits of your 401(k) and ensure a comfortable and secure retirement.