Log InJoin 

What Are Some Advantages Of A 401(k)?

Most working individuals are familiar with some of the advantages of having a 401(k). Even with this knowledge only about 50% of employees who are eligible currently contribute to a company-sponsored retirement account. Some of the apprehension from employees may result from a lack of information being disseminated by the company in explaining the benefits but also fear about their retirement accounts due to volatility in the stock market and other financial instruments. Even though 401(k)s may be susceptible to market downturns and other market volatility they are still beneficial for employees to have strictly based on its more prominent advantages such is employer matching and various tax benefits.

Many employers, to incentivize employees to contribute company-sponsored retirement accounts such as 401(k)s, will offer matching programs. 401(k) matching means the company will contribute dollar for dollar, or some percentage, up to a certain set amount. What this means for employees is that if they contribute $400 a month to their 401(k) the company will match $.50 on the dollar up to $3,000. Now this is an example to illustrate company matching but this shows that simply by saving for retirement in a company plan employees are receiving an extra $3,000 a year in compensation at no cost to them. I don't know about you, but I hesitate to pass up free money especially when there are no strings attached and it's your employer who is providing the funds.

Another advantage of a 401(k) is that contributions are taken out of your paycheck on a pretax basis. If you make $1,500 per paycheck and you contribute $300 to your 401(k) then you are only taxed on $1200 as earned income. And since the money contributed to the 401(k) is tax-free and compounded it can grow significantly in even as short a time as 10 to 15 years. 401(k) accounts can also be rolled over to other organizations if you should change jobs so their mobility means it follows you throughout your career.

Government regulations regarding 401(k) plans require employers to send plan members timely account statements showing overall balance and performance. Since a 401(k) is a retirement specific account it is important for employees to understand what their money is doing and whether or not it is performing up to their expectations. The information provided is generally easy to understand and it is put in layman terms. Plan members can evaluate their retirement goals and decide to increase or decrease their 401(k) contributions based on these important required reports.

401(k) plans, much like Individual Retirement Accounts or IRAs, actually provide a great deal of control on how the funds are invested. While not as flexible as an IRA invested with a brokerage firm by allowing purchases of individual stocks, bonds, mutual funds or other types of securities, they do still have some flexibility. Many 401(k) plans are managed by national financial institutions which offer various types of mutual funds to allow you to diversify your holdings somewhat. For example, you can have $100,000 sitting in a 401(k) that is split between three different types of mutual funds for aggressive growth, foreign stocks and bonds. This allows employees to periodically adjust their 401(k) distributions to move into different sectors and try to obtain better performance.

There really is no reason why an employee who works for a company who offers a 401(k) plan to not be maxing out the contributions and saving for retirement. 401(k)s are structured to allow individuals to control their financial futures and plan for retirement while incentivizing them with company matching and tax benefits. These are only some of the advantages of having a 401(k) plan and more information can be provided from your company or from the organization who manages your 401(k). For all current workers it is important to understand that pensions and Social Security may not exist in the future or may not adequately provide sufficient income to live on during retirement. A 401(k) is almost self managing due to automatic deductions from your pay check so it takes most of the work out of saving for the future which is helpful.