Your Personal 401(k) Handbook |
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How to Spot a Good 401(k) Plan
Here are some qualities to look for in your company's 401(k). Above all, you're looking for a plan with a broad array of choices that gives you the highest possible return on your dollar.
A high contribution limit: The better plans allow you to put in a healthy percentage of your income. The average limit is 14 percent.
Investment choices: You're going to want to spread your assets out among treasury bonds, mutual funds, equities, municipal bonds and other investments to guard against market shocks. Good plans will allow you to designate a percentage of your account to place in each sector.
Risk options: For aggressive investors, a 401(k) should offer the choice of putting money into small-cap equities or a stock-index fund.
A generous match: This is probably the most important thing to look for. The best plans offer a dollar-for-dollar match, but only 12 percent of companies are willing to do this. The most common match is 50 cents on your dollar.
After-tax contributions: Flexible 401(k)s will allow you to put additional money into your account after you've paid federal and state taxes on it.
Quick vesting tracks: To be "vested" means to have full rights over the corporate money donated toward your retirement plan should you terminate employment. Some plans vest you at a graded rate -- 25 percent contribution after one year, 50 percent after two, and so on. Others follow the "cliff" method -- they don't vest you at all until five years have passed and then you get 100 percent treatment. The best method is complete and immediate vestment, offered by about a quarter of American companies.
Trading availability: Quality plans will let you move your money among the investment options on a daily basis. (However, some financial planners warn against habitual 401(k) trading because it tends to weaken the long-term stability necessary to build a strong portfolio over time.)
Toll-free number: Your plan should allow you to make trades via a toll-free number.
Web access: Some plans even let you switch things around online.
Loan access: Though it's not always a good idea to borrow money from your tax-deferred 401(k) account, nearly 90 percent of plans will allow you to do this.
Statement frequency: Expect to get updated on your account status at least quarterly.
Next: How to spot a bad plan >
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