Liz Weston: How to spot a great 401(k)

Oct 10, 2022, 4:02 AM | Updated: 7:31 am
FILE- In this Nov. 15, 2017, file photo, new $1 bills are cut and stacked at the Bureau of Engravin...

FILE- In this Nov. 15, 2017, file photo, new $1 bills are cut and stacked at the Bureau of Engraving and Printing in Washington. It pays to know the difference between a good 401(k) and a great 401(k). Compared to an average plan, great plans offer features that could potentially lead to tens of thousands of dollars in additional retirement money. Learn the ins and outs of your current 401(k) and compare it to some of the hallmarks of a great 401(k). (AP Photo/Jacquelyn Martin, File)

(AP Photo/Jacquelyn Martin, File)

Any 401(k) can help you save for retirement. A great 401(k) allows you to save a whole lot more.

The difference between a mediocre plan and a great one could translate into tens of thousands of dollars in future retirement money. Plus, a 401(k)’s quality can show how serious a company is about attracting and retaining good workers.

That’s not to say you should leave or turn down a job if it doesn’t offer a great 401(k). But knowing how to spot a best-in-class retirement plan can help you evaluate job offers, negotiate a raise to compensate for what you’re missing and perhaps encourage your employer to make its plan better.

Here are three features of great 401(k)s.

A GREAT 401(K) DOESN’T MAKE YOU WAIT TO START SAVING

A good 401(k) comes with a company match, plenty of low-cost investment options and low fees. A great 401(k) doesn’t make you wait to take advantage of those features.

Many plans now allow participants to begin contributions immediately, with no waiting period. Others have waiting periods of one to six months. Some require people to wait a full year — the maximum allowed under federal law — and that delay can be expensive for workers.

Let’s say you’re 25, earning $50,000 a year and able to contribute 10% of your pay. The $5,000 you can’t contribute the first year, plus a typical $1,500 match you wouldn’t earn, could mean about $106,000 less in your retirement account by the time you’re 65, assuming 7% average annual returns.

If you change jobs in the future – as you almost certainly will – every waiting period you encounter could compound the damage.

A GREAT 401(K) LETS YOU KEEP THE MATCH

Plans offer a number of different matching formulas , with some of the most common being 50% of the first 6% of earnings and 100% of the first 3% to 6% of pay.

The more generous the match, the better for participants — to a point. Many plans have long vesting periods for employer contributions. You might not have a right to any matching funds until you’ve worked for the company for three years, for example. After you hit the three-year mark, you would own 100% of any match you’ve earned and 100% of any future matches.

Another common approach is a six-year “graded” vesting schedule. You might have to work two years before you get 20% of the match. You would get another 20% after each year of service until you were 100% invested in past and future matches after year six.

But long vesting periods have come under fire because of their negative impact on today’s more mobile workers . A 2016 report by the U.S. Government Accountability Office found if a worker left two jobs before vesting, at ages 20 and 40, the matches they forfeit could be worth $81,743 at retirement.

A growing number of plans give employees immediate ownership of matching funds — 44.2% in 2021, up from 38.5% in 2017, according to Hattie Greenan, director of research and communications for the Plan Sponsor Council of America.

You’re always 100% vested in your own contributions, but it’s important to understand any restrictions imposed on your employer’s contributions — and perhaps push for shorter vesting periods.

A GREAT 401(K) GIVES YOU MORE WAYS TO SAVE

Most plans today offer a Roth 401(k) option that allows participants to put away money that won’t be taxed in retirement.

Contributions to a regular, pre-tax 401(k) give you an upfront tax break, but withdrawals are taxed as income . Contributions to a Roth 401(k) don’t reduce your current tax bill, but withdrawals in retirement are tax-free. Financial planners often suggest clients have money in both pre-tax and tax-free accounts to better manage their tax bill in retirement.

The IRS limits pre-tax and Roth 401(k) contributions to $20,500 in 2022 for people under 50 and $27,000 for people 50 and older. But total contributions — by participants and their employers — can be up to $61,000 for people under 50 or $67,500 for those 50 and older, if the plan allows it.

Some plans offer the option to make additional, after-tax contributions, which can help you stuff a whole lot more money into your retirement plan.

Let’s say you’re under 50 and max out your pre-tax contributions. Your company contributes a $6,000 match, for a total of $26,500. If your plan allows, you could contribute as much as $34,500 to the after-tax option to meet the combined employer and participant contribution allowance.

Money in after-tax accounts can grow tax-deferred, which is a nice perk, but some plans offer something even better: “in plan” conversions that let you quickly move the money into Roth accounts, minimizing the potential tax bill. This combination of after-tax contributions followed by conversions is known as a “mega backdoor Roth ,” and it can be mega-helpful in piling up future tax-free funds.

___________________

This column was provided to The Associated Press by the personal finance site NerdWallet. The content is for educational and informational purposes and does not constitute investment advice. Liz Weston is a columnist at NerdWallet, a certified financial planner and author of “Your Credit Score.” Email: lweston@nerdwallet.com. Twitter: @lizweston.

RELATED LINK:

NerdWallet: What is a 401(k) plan? https://bit.ly/nerdwallet-what-is-a-401k

Copyright © The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

AP

Associated Press

Police fatally shoot man who allegedly had gun in St. Paul

ST. PAUL, Minn. (AP) — Police in Minnesota say an officer fatally shot a man who they say displayed a handgun as they were trying to arrest him. The St. Paul Police Department said Tuesday that officers were responding to a domestic assault Monday evening and were told by the caller that the man had […]
8 hours ago
Associated Press

Foundations, major donors tackle nation’s nursing shortage

As more nurses leave their jobs in hospitals and health-care centers, foundations are pouring millions of dollars into efforts to ensure that more stay in the profession and get more out of the job than just the applause and pats on the back they got during the bleakest days of the pandemic. Philanthropic pledges announced […]
8 hours ago
Brendan Fraser poses for a portrait in Los Angeles on Friday, Nov. 18, 2022, to promote his film "T...
Associated Press

Brendan Fraser is back. But to him, ‘I was never far away’

NEW YORK (AP) — In a darkened hotel room in New York’s Soho neighborhood, Brendan Fraser kindly greets a reporter with an open plastic bag in his hand. “Would you like a gummy bear?” Fraser, the 54-year-old actor, is in many ways an extremely familiar face to encounter. Here is the once ubiquitous ’90s presence […]
8 hours ago
FILE - Robinhood CEO Vlad Tenev poses for a picture during an interview on July 28, 2021, in New Yo...
Associated Press

Robinhood takes on retirement in search for more growth

NEW YORK (AP) — Robinhood, the company that blazed onto Wall Street after turning millions of novices into investors by making trading fun, is now setting its sights on a more staid corner of the industry: saving for retirement. The company on Tuesday is initiating signups for a retirement program, where customers can sock savings […]
8 hours ago
FILE - Facebook's Meta logo sign is seen at the company headquarters in Menlo Park, Calif., on, Oct...
Associated Press

Meta oversight board urges changes to VIP moderation system

LONDON (AP) — Facebook parent Meta’s quasi-independent oversight board said Tuesday that an internal system that exempted high-profile users, including former U.S. President Donald Trump, from some or all of its content moderation rules needs a major overhaul. The report by the Oversight Board, which was more than a year in the making, said the […]
8 hours ago
Associated Press

Pope tightens oversight of Vatican-linked foundations

VATICAN CITY (AP) — Pope Francis on Tuesday tightened control and oversight over Vatican-based foundations and associations in his latest effort to impose international standards of accounting and governance on Vatican offices and affiliated entities. A new law aims to bring the Holy See into further compliance with recommendations from the Council of Europe’s Moneyval […]
8 hours ago

Sponsored Articles

...
Quantum Fiber

How high-speed fiber internet edges out cable for everyday use

In a world where technology drives so much of our daily lives, a lack of high-speed internet can be a major issue.
(Photo via MLB's Arizona Fall League / Twitter)...
Arizona Fall League

Top prospects to watch at this year’s Arizona Fall League

One of the most exciting elements of the MLB offseason is the Arizona Fall League, which began its 30th season Monday.
...
SCHWARTZ LASER EYE CENTER

Key dates for Arizona sports fans to look forward to this fall

Fall brings new beginnings in different ways for Arizona’s professional sports teams like the Cardinals and Coyotes.
Liz Weston: How to spot a great 401(k)