401(k) / 403(b) FAQs
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- What is a 401(k) plan?
A 401(k) plan is a retirement savings plan that allows you to save money for your future in a tax-advantaged account. Under the plan, you contribute pre-tax dollars to your account through payroll deductions, usually at a set percentage of your salary. Some employers match employee contributions up to a particular percentage. All contributions are then invested, generally among a menu of mutual funds or similar investments offered by your employer. Most plans allow the participant to direct the investment of their account among these funds.
At retirement, you receive the balance in your account, which is based on the contributions plus or minus investment gains or losses. The balance in your account will fluctuate over time due to changes in the value of your investments.
- What is a 403(b)?
A 403(b) plan works in a very similar way to a 401(k), but it is generally only available to employees of certain nonprofit entities, universities, or public schools.
- Who makes contributions to my plan?
You make pre-tax contributions to your plan through automatic payroll deductions. Some employers make matching contributions up to a certain percentage. Your contributions are optional, but you'll want to contribute at least as much as your employer match to take advantage of this "free" money.
Note: A plan may require a person be age 21 and be employed with their company for a certain period before they are eligible to begin participating in the plan. 403(b) plans must generally offer immediate eligibility to make salary deferral contribution.
- What is an employer match?
Many employers match a percentage of your contribution. This can quickly add up as additional savings in your account. You'll want to take advantage of this "free" money if it is offered under your company retirement plan.
- How much can I contribute?
You choose how much you want to contribute as a percentage of your salary. You can contribute anywhere from 1% to 100% of your salary, up to $16,500 for 2009. If you are over the age of 50, you may also make an additional "catch-up" contribution of $5,500.
- What is a catch-up contribution?
If you are age 50 or older, you may be able to make additional annual pre-tax contributions. If you weren't able to save earlier in life, utilizing the catch-up provisions may be a way for you to save more.
- Can I withdraw money from the plan before retirement?
If you have an immediate financial need created by severe hardship and you lack other reasonably available resources to meet that need, you may be eligible to receive a hardship withdrawal from your account if offered under your plan. A hardship, as defined by the government, can include:
- Buying a principal residence
- Paying for certain college education expenses
- Paying certain medical expenses
- Preventing eviction from or foreclosure on your principal residence
- Paying for repairs of damage to your principal residence that would qualify as deductible casualty expense
- Certain funeral or burial expenses
After taking a hardship withdrawal, elective deferrals are generally suspended for a period of six months. Taxes and early withdrawal penalties may apply. If you feel you are facing a financial hardship, you should see your benefits administrator for more details.
- Can I borrow money from my account?
Your plan is intended to help you put aside money for retirement. However, many plans have included a feature that lets you borrow money from the plan. The amount the plan may loan to you is limited by rules under the tax law. See your Summary Plan Description for details.
- How do I change the beneficiary information for my plan?
Be sure to specify a beneficiary for your account and review this information on a regular basis. Your beneficiary receives the balance of your account in case of your death. You may select multiple beneficiaries or primary and secondary beneficiaries. To provide or make changes to your beneficiary information, contact your benefits administrator.
- How do I change the address on my plan?
To change your contact information, contact your benefits administrator.
- How can I change the amount I am contributing?
Contribution rates can be changed by contacting your company's human resources or payroll division. If your plan sponsors have contracted with BB&T/SHDR to manage their plan's contribution rates, participants can make election changes online.
- How often can I change the amount I am contributing?
One of the best things about 401(k) and 403(b) plans is that they are very flexible. You can increase or decrease the amount you are contributing. The frequency of changes may be limited in your plan document. You can stop you contributions at any time.
- How can I check my account balance?
To check the balance in your 401(k)/403(b) account, log on to PlanTrac and click the Balance Information link. This page outlines amounts by fund and by source.
- What if my employment ends with my employer where I have a retirement savings?
You own your salary deferrals and any plan earnings on those deferrals. If your employment ends for any reason, the money is yours to take with you. Company contributions may or may not be yours depending on your plans vesting schedule. By transferring your eligible "roll-over distribution" to an IRA or your new employer's 401(k)/403(b) plan, you can continue deferring taxes and growing your retirement savings until you make withdrawals.
- Who makes the investments choices for my 401(k)/403(b)?
Plans generally offer a selection of mutual funds at different investment risk levels for you to choose from. Some plans offer portfolios prestructured to meet certain risk levels. You choose a portfolio based on your tolerance for risk. If you do not make selections, your contributions will be deposited into funds selected by your employer.
- How does a mutual fund work?
A mutual fund combines the money of thousands of people and invests it in a variety of assets — typically stocks, bonds and money market investments.
Mutual funds offer individual investors the opportunity to participate in a large portfolio of investment holdings with a relatively modest amount of money.
- Your money is pooled with money from other investors who have similar objectives.
- Mutual funds are managed by professional money mangers dedicated to finding attractive investment opportunities.
- Most funds own hundreds of stocks and/or bonds. This gives you the benefit of greater diversification and risk management than you could achieve on your own.
- Investment earnings are paid back into the fund, and operating expenses are paid out of the fund.
- The remaining income and capital gains are distributed to fund shareholders. In most retirement plans, these distributions are automatically reinvested in additional shares of the fund.
- How do I know which mutual fund to choose?
It is important to read the fund descriptions and to note each fund’s investment objectives; what assets it invests in; and the level of potential risk associated with that type of portfolio. You’ll see a correlation between the potential risk and the potential reward.
- Money market funds and bond funds provide more conservative returns along with lower potential risk of loss.
- Stock or equity funds offer the opportunity for high returns but carry a higher risk of loss.
- Some funds offer a portfolio that combines stocks, bonds, and money market investments.
By considering your retirement savings goal, the amount of time you have to allow your plan investments to grow, and your own tolerance for risk, you can select the funds that best match your needs.
- Can I change my fund elections?
- How can I learn more about the funds?
Logon to PlanTrac, and click the Elections Information link. This page shows all the funds in which your contributions are invested. To learn more information about a particular fund, click the name of the fund to view recent fund performance and key statistics.
- How much can I save with my plan?
This depends on how much money you and employer contribute to your account, when you retire, and what your year to year investment returns are. There is no guarantee of any investment return. It depends on market conditions and the level of risks you take with your investments.
- How do I stay on track with my investment goals?
1) Review your plan periodically.
Your ability to contribute to your plan and your tolerance for risk will probably change as the years pass.
- Younger people have a longer investment time frame and often are comfortable with more investment risk, since they have many years to make up any short-term investment losses. As a result, young people may consider putting most of their retirement plan money into stock funds.
- As retirement gets closer, people typically have less tolerance for risk and tend to switch some of their stock investments to bond funds to add more relative stability to their portfolios.
- When investors enter retirement, protecting and preserving principal can become even more important. However, keeping some money in stock funds can help provide a hedge against inflation.
2) Increase your dollar contribution or deferral percentage.
3) Make catch-up contributions, if needed, after age 50.
4) Avoid setbacks such as:
- Taking a hardship withdrawal
- Taking a plan loan
- Stopping your plan contributions
- Cashing out of the plan if you leave your employer