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Starting a New Job? Here’s How to Tell if Your New 401(k) Plan Sucks
If you’re a new employee, conventional wisdom tells you to sign up for your 401(k) as soon as you can. Otherwise you’re simply missing out on free money you could accumulate in compound interest and employer contributions.
I was sure it couldn’t be that simple, so I reached out to some retirement experts to clear things up.
Turns out — like most things involving your finances — it’s not totally cut-and-dried.
“Personally, I don’t believe there is a bad 401(k) plan, considering that something is better than nothing,” says Dolph Janis, an income specialist at Clear Income Strategies Group in Charlotte, North Carolina.
But he also points out, “There is a lot involved to 401(k)s and a bunch to understand.”
It can be easy to sign up for something that’s not a good fit or pay too much in fees. Retirement planning is complicated, and a lot of people just don’t have the tools to navigate it.
Fortunately, there are people who do. If your employer sponsors a 401(k) plan, you should have access to people who can answer questions in your best interest.
Which questions should you ask?
Here’s what to look for when you start a new job to ensure you’re putting your retirement savings in the best possible hands.
1. When are You Eligible to Join?
The first question is probably one of the most obvious: When can you join your new employer’s 401(k) plan?
Among the bustle of starting a new job, you can easily lose the details of your new (hopefully awesome!) benefits. Will you be contributing a portion of your first paycheck to your retirement plan, or will you have to stay in the job a year to see the benefit?
Catherine Collinson, president of the Transamerica Center for Retirement Studies, says it’s not unusual for a 401(k) plan to come with a waiting period — even up to a year.
If you can’t start contributing right away, you can still save for retirement.
Collinson recommends opening an IRA or starting with the more short-term myRA to get started.
“The other thing you can do is just save on your own,” she says. “Run the numbers. Save the same percentage in a regular savings account or IRA. The key is to get into the habit of saving.”
2. Does Your Employer Match?
The greatest benefit of an employer-sponsored 401(k) plan is if your employer also contributes to your retirement. Employers may match a percentage of each paycheck you choose to contribute, but with a limit.
The most common match is 50 cents on the dollar, up to 6% — but this varies a lot.
Taylor Media offers its employees a 4% match, and I have one co-worker who built a pretty nest egg with a former employer who matched up to 10%!
Make sure you know how much your employer will match and for how long, Janis notes.
3. Will You Be Enrolled Automatically?
Collinson says automatic enrollment in an employer-sponsored 401(k) is becoming more common, so be sure to check when you’re hired.
If your employer’s plan includes an auto-enrollment provision, you’ll have a much easier time opting out before you’re enrolled than getting out of the plan after you’ve made contributions.
If you’ll be auto-enrolled, find out the default contribution rate. Collinson says most plan sponsors will set your contribution to only 3%, even though “for most employees, 3% is nowhere close to enough” to save for retirement.
Auto-enrollment is certainly a convenient option, so don’t let it deter you. Just “do your homework,” as Collinson suggests, so you can make an informed decision.
While we’re talking about homework… also do the math to determine the right contribution rate for you.
4. Can You Rollover From an Existing 401(K)?
Most 401(k) plans should come with an option to rollover into a new plan when you move on to a new employer.
“This tends to be the best course of action,” Collinson explains.
But even the rollover comes with variables, and you should know what they are. Not taking care of your 401(k) when you move jobs could mean losing a lot of money, particularly if your balance is less than $5,000.
“Many plans include the ability to automatically cash out balances under $5,000 of terminated employees,” Collinson says.
You’ll get that cash, but it will likely be susceptible to income taxes and a 10% penalty if you’re younger than 59 ½ years old. That could mean losing more than one-fifth of your savings!
Even if your new plan has a waiting period, you’ll likely be able to rollover your old plan before you start making contributions. Acting early can help you avoid cashing out.
If you can’t roll existing savings into your new 401(k), roll it over instead into an IRA and avoid the penalties, Collinson suggests.
5. What Fees Are You Paying?
“With 401(k)s, it’s all about the fees,” says Ash Toumayants, founder of wealth management firm Strong Tower Associates.
Toumayants explains 401(k) fees are relatively high, because the plans are subject to more regulations than other retirement plans. These regulations are in place to protect employees, but you may not want to absorb the brunt of the cost!
He points out, “Regardless how expensive it might be, it’s still a good idea to sign up for a workplace 401(k) if the employer matches,” because you stand to gain more than you lose.
But either way, find out which fees you’re paying and how much they’re costing you — not only now, but over time.
As we’ve mentioned before, courtesy of — who else? — Billy Eichner, “Just like interest compounds, so do fees.”
Let’s hear that from an actual expert, too. Wealth Consulting Group’s CEO Jimmy Lee, CFS, says, “understanding all of the participants’ costs involved in participation is important as it can add up to make a big difference over the long run.”
Lee says your fees shouldn’t amount to more than about 1% of your investment.
“The more aggressive strategies can go over 1% and the more conservative options are typically under 1% but the average should be around 1% or less,” he adds.
Your fees might not be obvious, so don’t be afraid to ask.
Collinson says the Department of Labor requires plan sponsors to provide information about fees and expenses. Ask a human resources representative where you can find this information, and be sure to review it.
What if your fees are out of whack? Keep reading!
6. Who Provides Your Plan?
Your 401(k) fees might be high simply because of ignorance.
Your employer likely isn’t a financial expert, so they rely on plan sponsors — and their sales reps — to help them understand retirement plans. Lack of research or resources could land you and your co-workers in a lousy plan.
However, your fees might also be outrageous because your employer is considering their best interests over yours.
“Be suspicious of 401(k)s that are provided through banks,” Toumayants warns.
Banks will target employers they have a lending relationship with, he explains. If your company has taken out a loan with a bank, for example, it might offer a better rate in exchange for using its 401(k) plan.
This doesn’t mean your employer is trying to take advantage of employees — but it doesn’t mean they’re not, either.
If your 401(k) provider is a bank, and not a fund company like Fidelity or Vanguard, do your research.
Ask your employer why this is the best plan for the company and how often they audit to be sure. It might not hurt to find out whether your employer has an existing relationship with the bank, as well, and how it might be affecting your retirement plan.
7. Where is Your Money Invested?
Many of us don’t want to worry about where our retirement funds are invested, as long as they’re going to be there for us when we need them!
But this information can be valuable — and it could actually cost or save you money.
All of the experts I talked to urge everyone to ask about the types of investments available in your 401(k) plan. And in case you don’t know much about investing, here’s what you should ask in particular:
Is the money invested in index funds or professionally-managed mutual funds?
Professionally-managed funds come with higher fees because a professional is, in fact, actively managing them. But the average person is better off with low-cost index funds, so those fees could be an unnecessary cost.
Toumayants points out you may have restricted investment options for your 401(k), but that’s probably a good thing. It helps prevent “paralysis by analysis” — having too many options to ever make a choice.
Just make sure the choices you have are the best for you and your coworkers — low-cost and in line with your retirement goals.
8. Who Can Answer Your Questions?
You’re probably not a retirement or financial expert, so you shouldn’t be expected to keep all this information straight on your own.
“It’s important that you find out who the plan custodian is,” Janis explains. “This is the person you will communicate with every month and/or year.”
This is the representative with your retirement plan provider who can help you understand your plan. They are not a personal financial planner, though, so don’t expect investment advice.
You can ask the plan custodian:
- What is the fee structure?
- What types of funds can you invest in?
- How many funds can you invest in (if there’s a limit)?
- How often can you make changes to your investments?
- To help you set your investments to best meet your needs (e.g. aggressive or conservative, according to your risk tolerance)
For investment advice and personalized financial planning, you’ll need to hire a fiduciary. Ultimately, though, make sure you’re getting the information you need to understand where your money’s going.
Collinson reminds us, “Retirement is a very, very personal question, and nobody cares more about your own retirement than you, your family and your loved ones.”
9. What Can You Do if Your Plan Sucks?
So… what if you get all the answers you need, and you realize your employer is simply offering a lousy retirement plan?
Toumayants suggests to first talk to your employer.
Share your (well-researched) concerns, and “ask about the next opportunity to shop around for a new plan,” he says. “Their retirement money is in that account, too!”
They probably want the best plan as much as you do.
If your employer can’t or won’t take steps to find an account better aligned with employees’ needs, an attorney might be able to help you.
Whether they’re ignorant or have bad intentions, your employer is responsible to act in the best interest of employees. An attorney could help you determine whether that’s happening and what you can do if it’s not.
Your Turn: What issues have you run into with your workplace 401(k)?
Dana Sitar (@danasitar) is a staff writer at The Penny Hoarder. She’s written for Huffington Post, Entrepreneur.com, Writer’s Digest and more, attempting humor wherever it’s allowed (and sometimes where it’s not).