401(k) explained: 11 of the most common retirement questions, answered
You have questions? We have answers. Whether you're an employee planning for your future or an employer supporting your team's road to retirement, we've got you covered. In this post, we'll tackle some of the most commonly asked questions about retirement.
🔎 For employees saving for retirement:
How much should I contribute to my 401(k)?
Deciding how much you should contribute to your 401(k) account is a personal choice — there's no right or wrong answer. We know that selecting a contribution amount can feel daunting, so we’ve outlined four steps that can help you make a decision:
- Examine your expenses: Add up your average monthly expenses like rent or mortgage, utilities, food, and entertainment. Make sure to include any student loans or credit card debt.
- Meet your match: If your employer offers a match, it can bes a good idea to contribute at least enough to receive the match. If you don't, it's like leaving part of your compensation on the table.
- Chart your goals: It's helpful to think about retirement as one piece of your overall financial well-being. When setting retirement goals, consider the costs of other important life events, such as buying a home, traveling, or starting a family. You may also want to factor in unplanned expenses — like medical bills — that could impact your retirement savings down the line.
- Explore your options: Just like retirement should be considered alongside other short and long-term goals, retirement savings accounts can be one of many tools in your broader financial portfolio. Explore additional savings and investing opportunities that fit your needs and adjust as needed as your plans evolve.
While this is an important decision in retirement planning, try not to stress yourself out too much. You always have the flexibility to change your contribution amount whenever you need to.
Should I contribute to my 401(k) even if there's no employer match?
If your employer doesn't offer a 401(k) match, you may wonder if it's worth it for you to contribute to that account yourself. Even if there’s no match, it's still a smart idea to participate in the plan because 401(k)s have a lot of tax advantages.
With a traditional 401(k), any contributions you make will be tax deductible, and any money earned in the account will be tax deferred over time, meaning you won't have to pay taxes on it now. Instead, you will only have to pay taxes on that money when you withdraw it during retirement.
If your employer did contribute to your plan, you would still receive those same tax benefits. But if you anticipate being in a lower tax bracket when you retire, placing your money in a 401(k) now could potentially save you thousands of dollars yearly in taxes.
How often should I rebalance my portfolio?
As an investor, it’s important to understand that your portfolio will fluctuate over time as the market shifts. By rebalancing your 401(k), you can manage your risk level, which may help protect you from financial loss.
Research shows there's no right or wrong way to approach rebalancing. It's all about what makes you feel comfortable and confident. Generally speaking, rebalancing your portfolio may help with:
- Managing risk: Rebalancing helps you maintain a risk level that suits your investment objectives, that way your investments match your chosen level of risk tolerance.
- Harnessing market movements: For more skilled investors, embracing market fluctuations can be advantageous through timely portfolio adjustments.
- Staying goal-oriented: Realigning your investments through rebalancing can help keep them in sync with your overall financial goals.
- Planning for your future: Rebalancing your investments can help keep you in sync with your overall financial goals and intended retirement timeline.
For a more in-depth dive on this topic, check out our guide to rebalancing your 401(k). And as always, before making any financial decision, consult your advisor or tax professional to discuss what's best for you.
How much should I pay in 401(k) plan fees?
Fees are a normal part of investing, but it can be challenging to know if the fees you're paying are high, low, or par for the course. Fees can significantly impact your retirement savings, especially when compounded over time.
From the people managing your investments to those handling the paperwork, there are different types of 401(k) fees to be mindful of. The Department of Labor divides these fees into three types:
- Investment fees: These are charges for managing your 401(k) investments to help them grow. The fees are usually a portion of your invested money and can vary based on how the funds are managed. Besides fund fees, your financial advisor might also charge an extra fee for their advice. In many cases, investment fees could make up the biggest part of 401(k) costs.
- Administration fees: People who run your 401(k) plan handle many tasks like day-to-day administration, record keeping, reporting, and compliance testing. They charge a fee – either a flat rate or a percentage of your invested money – for their work.
- Individual service fees: Sometimes, you might need specific services, like distributing funds or processing a 401(k) loan. Providers can charge you extra for these one-time services.
The industry-average fee charged by 401(k) providers is 1.60%.¹ With an account fee of 0.08%, the estimated total cost for an active participant investing in one of Guideline’s managed portfolios can be under 0.15% — that’s up to 10x less than the industry average.²
We also don’t charge employers or employees for routine one-time transactions, so you won’t pay transaction fees for things like 5500 prep, rollovers, or distributions.
Can I contribute to a 401(k) and an IRA at the same time?
There are different types of retirement accounts; two of the most well-known are 401(k)s and IRAs. Generally, an employer provides a 401(k), and an IRA is an individual retirement account that individuals can open on their own.
Research shows that most people are unaware or uncertain if they can contribute to a 401(k) and an IRA in the same year. Not only can you contribute to both a 401(k) and an IRA in the same year, but you can actually contribute to last year's IRA — also known as a carryback contribution — until you file that year's taxes, which can help you save more money for retirement.
Keep in mind that there are rules and limits to how much you can contribute, which we outline in detail here.
What is the difference between Roth and traditional 401(k) retirement accounts?
Contributions for both traditional and Roth 401(k) accounts are tax-deferred, meaning you won't pay taxes on your earnings each year like you would with a general investment account. And while both have tax benefits, that's where they differ:
- A traditional 401(k) gives you a tax benefit today by lowering the income taxed during the year contributions are made.
- A Roth 401(k) gives you a tax benefit in retirement, since contributions are made with after-tax income.
- Looking for an easy way to remember the difference? Roth = retirement, and traditional = today.
You can learn more with our guide to understanding the difference between a traditional and Roth 401(k).
🔎 For employers offering a 401(k) to employees:
Am I required to offer a 401(k)?
Potentially, yes. Whether you’re required to provide a 401(k) depends on your business location, due to recent state-mandated retirement programs. The rules of these programs vary greatly from state to state, but they could help bridge the retirement gap for the millions of U.S. workers who currently don’t have access to an employer-sponsored plan.
And while not every state requires employers to offer a retirement benefit, offering a 401(k) brings many advantages, including:
- Potential tax advantages of a 401(k): Both you and your employees can benefit from potential tax advantages with a 401(k) plan.
- 401(k) plans are easier than ever to open and administer: If you’re worried about the complexity of offering a retirement benefit, a Safe Harbor plan might be a great fit for your company. A Safe Harbor 401(k) can help boost savings and reduce admin work. In fact, plan admin on a Guideline Safe Harbor 401(k) takes less than 30 minutes a month for most plan sponsors.³
- A 401(k) can help attract talent and boost employee loyalty: Offering a 401(k) can make your business more appealing to potential employees and offer a competitive edge in the job market. Additionally, providing a retirement benefit shows you value your employees' long-term financial security, which can positively influence loyalty.
- A 401(k) can help increase productivity, too: One study found that approximately one-third of employees report being distracted by personal finance issues while at work, with almost half of them spending three or more hours weekly handling these issues during the work week. Offering a 401(k) is a signal that you’re investing in your employees’ overall financial well-being and can offer your team peace of mind.
When is the best time to start a new 401(k)?
There's no wrong time to offer a retirement benefit to your employees. However, there are a few advantages to starting a 401(k) earlier in the calendar year that employers can take advantage of, including:
- Maximize savings: By starting a 401(k) on January 1, employees will have a full 12 months to make deferrals and maximize their contributions.
- Nondiscrimination testing is more predictable: In a short plan year, there's little time to determine whether your plan will pass or fail nondiscrimination testing. Starting a 401(k) plan on January 1 will give your team a full year to monitor your plan's activity and assess its compliance testing risk.
- Improved employee experience: Employees have a better experience when you roll out a 401(k) at the end of the year because they're already thinking about other benefits like health, vision, and dental plans.
Should I offer profit sharing?
Profit sharing can be a win-win for both employers and employees, helping employees save more for retirement without adding to their yearly taxes. There are many advantages to profit sharing, including:
- It's a bonus with tax benefits: Profit sharing contributions are tax-deductible to the employer and aren't subject to Social Security or Medicare withholding. As a year-end bonus, a profit sharing contribution may be worth more to employees than a similarly-sized direct bonus payment.
- A flexible benefit: Not sure if you can offer a potentially costly employee benefit? With profit sharing, contributions are tax-deductible for employers for the previous tax year. This delayed approach allows employers to assess their finances before deciding whether or how much they want to contribute to each eligible employee's 401(k) account.
- All employees can reap the rewards: Profit sharing is a great way to contribute to highly compensated employees — those earning $150,000 or more — without failing IRS compliance limits for nondiscrimination testing.
- A benefit that can vest over time: Employers can choose a contribution vesting schedule based on an employee's tenure. Employees who leave the company before their contributions are fully vested forfeit the unvested portion. Vesting can incentivize retention, as employees receive more contributions to their 401(k) the longer they stay.
What's the difference between a 401(k) and a pension plan?
Both 401(k) plans and pension plans are employer-sponsored retirement plans. A 401(k) is a defined-contribution plan, which means the employer contribution amount going into the plan is specified, but the future benefit isn't set. With a 401(k), employees and employers can contribute, and employees can choose their own 401(k) investments.
A pension plan is a defined-benefit plan that provides a specified payment amount in retirement. But with pensions, employees don't have control over the plans' investment decisions.
Do I get a tax credit for my 401k?
Maybe! The recent retirement legislation SECURE 2.0 incentivizes employers to offer retirement benefits through generous tax incentives — specifically the enhanced Retirement Plans Startup Costs Credit and the Small Employer Automatic Enrollment Credit. Combined, these tax credits can add up to a maximum of $5,500 per year for three years or up to $16,500 for eligible employers.⁴
The program also established Starter 401(k) plans, which are simplified 401(k)s for employers that have never offered a retirement plan. A Starter 401(k) can be a great option for a small business that can't afford the administrative complexities and heavier price tag of a traditional 401(k) but still want to allow employees to save for retirement.
You can dive deeper into all things SECURE 2.0 with our guide for employers.
The information provided herein is general in nature and is for informational purposes only. It should not be used as a substitute for specific tax advice that considers all relevant facts and circumstances. Guideline makes no representations or guarantees with regard to investment performance as investing involves risk and investments may lose value. Clients should consult a qualified investment or tax professional to determine the appropriate strategy for them.
¹ The average investment expense of plan assets for 401(k) plans with 25 participants and $250,000 in assets is 1.60% of assets, according to the 23rd Edition of the 401k Averages Book. Data is updated through September 30, 2022, and is inclusive of investment management fees, fund expense ratios, 12b-1 fees, sub-transfer agent fees, contract charges, wrap and advisor fees or any other asset based charges. Guideline’s managed portfolios have blended expense ratios ranging from 0.064% to 0.067% of assets under management. When combined with an assumed account fee of 0.08%, the estimated total AUM fees for one of Guideline’s managed portfolios can be under 0.15%. Expense ratios for custom portfolios will vary. These expense ratios are subject to change by and paid to the fund(s). View full fund lineup.
² An assumed annual account fee of 0.08% is applied to assets under management and is deducted on a monthly basis. It’s calculated at 1/12 of the annual stated rate (0.08%) based on the account balance on the last day of each month. Alternative account fee pricing is available, ranging from .08% to 0.35%. See our Form ADV 2A Brochure for more information regarding fees.
³ Research insights based on data collected in May 2023, from a survey conducted by Guideline that consisted of 73 current customers (34 of whom had a Safe Harbor 401k plan) Though the survey is broad in scope, the experiences of the respondents in this survey may not be representative of all companies.
⁴ Please consult a tax professional for l to determine what types of tax credits or deductions your company is eligible to claim.