Most 401(k) brochures that mutual fund companies hand out to companies are masters of the obvious – they don’t dig down and give employees the critical information needed to get the most out of a 401(k) plan. That’s an unhealthy situation for legions of 401(k) investors who deserve better.

After all, a wise Wall Street sage once said that the definition of a successful investor is someone who questions everything.

That’s as true on Main Street, home of the nation’s 401(k) investors, as it is inside the concrete canyons of Wall Street.

Sure, 401(k) plan sponsors do a good job in laying out the basics of a 401(k) plan, explaining investment options, contribution limits and the like. But for the deeper, more probing questions, 401(k) investors are often on their own. Let’s try to narrow the information gap a bit with answers to the following oft-overlooked 401(K) plan questions.

1. “Geez, What if I Change My Job?” – What happens to your 401(k) when you change employers? What you don’t do is take a distribution from your 401(k) plan. If you’re under age 59 1/2, you’ll get socked with tax penalties that can reach up to 20 percent of your plan’s assets (normally in the form of a 10 percent “early withdrawal” penalty and additional taxes that you’ll owe anyway for taking money out of a 401(k) plan at a higher tax bracket than you’ll likely have in retirement. You can leave your money in your old company’s 401(k) plan in most instances, unless you have less than $5,000 accumulated in your plan. It’s basically money you won’t be able to touch until retirement, but is that such a bad thing? You can also rollover your money from your old 401(k) into your new company’s 401(k), which is what most people do. Usually they do this because the new plan is better, or the new employer’s company match makes it worthwhile. Lastly, you can always roll the money over into an Individual Retirement Account (IRA)

2. “How Can I Tell if My Plan, Well, Sucks?” – There’s no shortage of red flags associated with lousy 401(k) plans. The biggest? Few investment options; too much emphasis on company stock (ask the Enron employees about that one); no employee match; high fees; and the lack of good company-sponsored investment education. Your 401(k) plan should offer at least five investment options, although the best ones offer up to 20, and have investment fees of no more than one percent of your assets under management. Also, a 401(k) plan should limit company stock to 20 percent of total assets. Company matches and education plans are up to the company. But if they don’t have them, lobby your human resources area for changes. After all, it’s your financial future at stake.

3. “Why Can’t I Take a Loan from My 401(k) Plan?” – You could, but it’s the equivalent of racing at the Daytona 500 and pulling over and taking a nap halfway through – you’ll never catch up. That’s because the money you take out of a 401(k) plan in the form of a loan negates the immense power of compound interest. Plus, if you leave your job, the money you owe must be paid back immediately.

4. “Is There Any Catch to this “Company Matching” Deal? – Actually, yes. Many companies impose certain restrictions on company matching with the notion that you have to hang around for a while to actually get the benefits you’ve earned. If you plan on leaving after three years, for example, you could lose money promised by the company under its “vesting” rules. Most vesting requirements are tied to the stipulation that you hang around a while, with five years the average vesting period. Some dirty, rotten, no-good companies will even take the company-matched earnings your 401(k) has made and keep it for themselves if you leave before you’re vested. It’s unethical, but legal.

5. “When it Comes to the Mutual Funds in My 401(k), Does Size Matter?” – You bet, but not in the way you might think. When choosing a mutual fund for your 401(k), try to abide by the “$1 billion” rule: if a fund has more than $1 billion in assets, try to avoid it. Why? Because the more money invested in a fund, the harder it is for the fund manager to sustain the high returns gained when the fund was smaller and nimbler. Simply stated, smaller funds have more room to grow.

The best 401(k) investors are the ones who ask questions. So don’t hesitate to e-mail your HR contact or call your plan provider with queries. Chances are you’ll be glad you did.


*401(k)-Oriented Web Sites That Provide a Wealth of Detailed Information:

Bloomberg News (www.bloombergnews.com) – Check out the site’s information-rich Mutual Funds Center.

Mutual Fund Education Alliance (www.mfea.com) – Great education site with lots of “how-to” information.

Financial Engines (www.financialengines.com) – A nice site that enables you to plug in your 401(k) data and calculate whether or not you’ll hit your retirement goals.