Answers to Frequently Asked 401(k) Questions
- What are the advantages of a 401(k) Plan?
Contributions are made with tax-free dollars. This money is deducted first and all taxes are paid on what remains after the 401(k) contribution is taken. As money in the plan earns income and gains in value, these gains are also not taxed. You pay taxes on 401(k) money only years later when you spend it in retirement. ▲ Back to top
- What is a Roth 401(k) and how is it different?
Roth 401(k) contributions are made with dollars that have been already taxed. The gains on this money while it is in the plan are not taxed. Years later, when you spend your Roth 401(k) money in retirement you pay no taxes at all on any money you take from the plan. ▲ Back to top
- My 401(k) plan stinks. What can I do about it?
The company decision-makers who choose your plan’s investments and the plan service providers should know that you are unhappy. They have a legal obligation to operate the best possible plan the company can afford. They should be reviewing the service, the investments, and the cost of the plan on a regular basis. The decision-makers will typically be the company owners as well as the financial and human resource people. ▲ Back to top
- How do I determine what my mix of stocks and bonds should be?
Your mix of mutual funds that invest in stocks or bonds (or both) should depend first on the length of time you have until retirement and your comfort level with regard to risk. To “beat inflation” you need to invest at least some of your money in stocks, but you have to accept the possibility of occasional sort-term losses in value. Historically, the stock market has always recovered from any “dips” and has averaged a 10% annual return. ▲ Back to top
- How does Pension Dynamics help me optimize my investment choices?
Pension Dynamics will suggest a diversified mix of investments chosen from among the funds offered by your plan. We will do this in either a group setting with written materials or in a one-on-one individual meeting or through a phone consultation. ▲ Back to top
- What should I know about owning company stock in my 401(k)?
It is never a good idea to have very much company stock in your 401(k). This makes both your job and your retirement nest-egg dependent upon a single company. ▲ Back to top
- Will I be charged fees or a load to buy my mutual funds?
In a 401(k) at Pension Dynamics, there are no funds that charge a commission. The only cost to you is the annual expense ratio of the fund. This is a disclosed cost that indicates the percent of your account each year that the fund has taken to cover its costs. This amount will typically be less than 1% per year. You never receive a bill for it and you never make a payment. It is just automatically deducted from your account. ▲ Back to top
- Are there special retirement plans for non-profit organizations?
Most non-profits now offer 401(k) plans but the traditional retirement account for non-profits has been the Tax Sheltered Annuity (TSA.) A 401(k) is generally superior because the investments have lower annual expense ratios. Most TSA’s are sold by agents who receive commissions from the investments that in turn charge you higher expense fees. ▲ Back to top
- I’m a “highly compensated employee” – can I benefit from a 401(k) plan?Absolutely. In some cases, because of complicated 401(k) participation requirements requiring most employees to contribute, a plan that does not meet these requirements will then have to limit what highly compensated employees deposit into the plan. While the legal limit for 2007 is $15,500, you could be informed at the end of the year that you contribution will be limited to, for example, $12,000 so that your plan will pass its tests and not be discriminating in favor of highly-compensated employees (HCE’s). An HCE is someone who made more than $100,000 in the previous year. ▲ Back to top
- Should I take a loan against my 401(k)?
Why not? It’s your money and the plan allows you to become your own banker. You will pay interest to yourself when you borrow, because every dime you pay is credited right back to your own account. You will be charged what a neighboring bank would charge for the same type of loan. Let’s say the prevailing interest rate is 7%. If you take your loan proceeds from a mutual fund that then starts rising in value at a rate of 10%, your 7% loan will not be earning as much as the fund you accessed for the money. This means you will have lost out on what would have been the 3% of additional earnings. On the other hand, if you take the loan proceeds from a money market fund that earned only 4%, you loan will actually be a better investment for your account because it is “earning” 7%. You’ll never know until after the fact if your loan was a wise move or not. It depends on what otherwise would have happened to the investments you chose as the source of your loan proceeds. ▲ Back to top
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"If you are looking for a well-designed 401(k) plan with superb investment advisors and administrative support, you have found a precious gem in Pension Dynamics."
Cathy Long,
Director
Human Resource & Administration
The Perfect Puree of Napa Valley
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