401(k) plans can be complex, and with misinformation scattered across social media and the internet, it’s important to do your research on all things financial. It’s likely that you’ve stumbled across a myth or two related to 401(k) plans or plan management, and we’re here to set the record straight.
Read on to review common misconceptions and the truth behind each.
Myth #1: Your Employer Manages Your 401(k)
Although you enrolled in a 401(k) through your employer, they do not oversee the plan as a whole. Rather, employers sponsor the overall plan, meaning they manage the business relationship with the plan providers, like Slavic401k.
The money that sits within each employee’s account is theirs to manage. This includes changing contribution amounts, investment options, or other account-related changes. Because the account is in your name, it is up to you, the plan participant, to manage the funds accordingly.
Myth #2: You Are Automatically Enrolled in Your Employer’s 401(k) Plan
Every employer operates differently, but you should never assume that you will automatically be enrolled in your company’s 401(k) plan. Companies often provide 401(k) plans as an employee benefit, though enrolling in the plan is not required.
If your employer happens to auto-enroll you in the company-sponsored plan, you do have the ability to opt out or adjust your contribution amount. Contact your employer’s human resources team or benefits specialist to learn about the plan guidelines.
Myth #3: Borrowing Funds from a 401(k) is Like Taking Money Out of the Bank
Having a 401(k) is another avenue for savings, though it operates differently. Unlike your regular checking and savings account at your primary financial institution, it is not a simple withdrawal or inexpensive option to borrow against your account.
According to Investopedia, borrowing against your 401(k) comes with downsides you must be aware of, including:
- Repayment costing more than your original contributions
- The potential need to reduce contributions while you pay the loan back
- Paying pre-tax contributions back with after-tax dollars
- Paying back the loan quicker in the case of job loss or termination
Borrowing from your 401(k) isn’t ideal. But if you are in a financial pinch and do not have an emergency savings account to use, it’s often a better financial choice than a personal loan or payday loan. To learn more about starting, using and contributing to an emergency fund, read our blog.
Myth #4: Employer Matches Are Yours to Keep
Employers utilize employer matches differently at every company, but it’s generally known that the matched contributions are not automatically yours to keep. Many employers have different tiers that allow employees to earn the match over time.
For example, a company may match 100% of the first 3% of contributions an employee makes, however, they are not available to the employee until they have been with the company for three years. Once the employee has worked at the company for three years, 100% of the matched contributions will belong to them.
Other companies, however, may work on a tiered system, where the employee will own a certain percentage of the matched funds over a set period of time. For example, after one year of service, an employee may be eligible for 25% of the matched funds, and so on.
This protects the employer from losing funds from employees who do not stay with the company long-term and serves as an incentive for employees to work with a company for a longer period of time.
You can read more about how employer matching works on our blog.
Myth #5: You Can Retire if You Maximize Contributions
401(k) accounts are not designed for people who want to set it up and forget about it. What’s more, maximizing contributions is not necessarily a recipe for a fruitful financial future. Managing a 401(k) plan requires time, strategy, and restructuring over the years.
Make it a habit to review your budget and your accounts to ensure that you’re saving enough for rising healthcare costs, inflation, taxes, and day-to-day spending for retirement. Your expenses will continue to incur over time, so make sure you’re planning appropriately. Many financial experts advise participants to adjust their strategy over time, moving from an aggressive investment approach to a more conservative approach before retirement.
It’s also important to review your contributions every time you experience a major life event, such as welcoming a new family member, getting married, etc. Based on your life event, you may need to adjust your spending and contributions to account for a new person or additional expenses.
401(k) myths extend beyond these five, and it’s important to do your research when it comes to making financial decisions. Make sure you understand the structure of your 401(k) plan, ask questions and make adjustments as needed to ensure you’re utilizing the plan appropriately.
For more financial wellness and retirement education, visit the Slavic401k blog.