Question 1

What is a 401(k) plan and how does it work?

Accepted Answer

A 401(k) plan is an employer-sponsored retirement savings plan that allows an employee to contribute a portion of his or her paycheck into a tax-advantaged investment account. The employee (or plan participant) typically chooses from a range of investment options within the 401(k) plan. These options, which often include mutual funds, are chosen by the plan sponsor—usually the employer. Approximately half of all assets in 401(k) plans are invested in mutual funds, which in turn are invested in stocks, bonds, and short-term investments.

Question 2

What are the benefits of investing in a 401(k) plan?

Accepted Answer

Tax planning. A traditional 401(k) plan reduces an employee’s immediate taxable income because contributions are tax-deferred. Many participants anticipate being in a lower tax bracket in retirement compared to their peak earning years, which may result in lower tax rates on 401(k) plan withdrawals in retirement. However, some participants, such as young employees with many working years ahead of them, may anticipate being in a higher tax bracket at retirement. If the 401(k) plan offers Roth 401(k) plan accounts, these participants can choose to pay tax on their contributions up front and pay no tax upon withdrawal. The ability to set aside some of their income on a tax-deferred basis, and in some cases to determine how their own contributions are allocated between a traditional and Roth 401(k), is just one way that 401(k) plans allow plan participants flexibility in tax planning for retirement.

Question 3

What is a 3(16) fiduciary?

Accepted Answer

A 3(16) fiduciary is a plan administrator responsible for managing the day-to-day operations of retirement plans. Typically, a 3(16) fiduciary is hired by small to medium-sized businesses looking for help managing their plans.

Question 4

What is a 3(38) Investment Manager & Fiduciary?

Accepted Answer

A 3(38) investment manager & fiduciary has a responsibility to ensure that plan participants have access to a carefully vetted menu of investment selections that includes a variety of asset classes and investment styles.    The 3(38) investment manager then has an ongoing responsibility to consistently monitor the investment options in the plan, and to make replacements as needed.

Question 5

Is there a limit to how much an employee and employer can contribute to a 401(k) plan?

Accepted Answer

Yes. As of 2023, an employee can defer up to $22,500 total to a 401(k) plan per year as pretax or Roth contributions. If an employee is 50 years or older, the employee can defer up to $30,000 as pretax or Roth contributions by taking advantage of a $7,500 catch-up contribution.

Question 6

What is a catch-up contribution and who is eligible?

Accepted Answer

A catch-up contribution is an additional contribution to a 401(k) plan that can only be made by an employee who is at least 50 years old. Once an employee has hit the plan’s contribution limit or the annual deferral limit of $22,500 (in 2023), he or she may contribute up to $7,500 as a catch-up contribution. Most employers offer this option, and some companies also match a percentage of the catch-up contribution.

Question 7

Can participants borrow from their 401(k) plan accounts?

Accepted Answer

Yes, if the plan allows loans. The maximum amount an employee can borrow from a 401(k) plan generally is the lesser of 50 percent of the vested account balance or $50,000.  Every plan is different, but some companies only allow employees to take out loans for specific reasons. Some companies also might have specific conditions under which they will allow the loan. For example, an employer may have a minimum loan amount or a company might limit the total number of loans that can be outstanding at one time. If an employee is married, the employer may require the spouse’s consent to the loan.

Question 8

What happens to an employee’s loan if an employee leaves a job or is fired?

Accepted Answer

Depending on the plan’s policy, the employee may be required to pay back the loan right away or pay the remaining amount to an IRA or another plan as a rollover within 60 days.

Question 9

What happens if an employee can’t repay a 401(k) loan?

Accepted Answer

If an employee can’t repay a loan, the money will be treated as distributed, or withdrawn.

Question 10

What are the disadvantages to a 401(k) loan?

Accepted Answer

The main disadvantage of taking a loan is the possibility that the participant will be unable to pay it back.

Question 11

What are hardship withdrawals?

Accepted Answer

A hardship withdrawal is another way an employee can access money from a 401(k) plan.

Question 12

When can a participant begin drawing down a 401(k) plan?

Accepted Answer

A participant can start drawing down a 401(k) plan, penalty free, once he or she is 59½ years old. A participant generally must start withdrawing the required minimum distribution (RMD) from a 401(k) plan by April 1 of the first year after the later of the calendar year in which the participant retires or reaches age 72.

Question 13

What is Secure Act 2.0?

Accepted Answer

The SECURE Act is intended to make it easier for Americans to save money in retirement, by allowing them to invest more money in tax-advantaged accounts and to withdraw that money later.

401k FAQ