AP

Liz Weston: How to spot a great 401(k)

Oct 9, 2022, 4:02 PM | Updated: Oct 10, 2022, 6:36 am

FILE- In this Nov. 15, 2017, file photo, new $1 bills are cut and stacked at the Bureau of Engravin...

FILE- In this Nov. 15, 2017, file photo, new $1 bills are cut and stacked at the Bureau of Engraving and Printing in Washington. It pays to know the difference between a good 401(k) and a great 401(k). Compared to an average plan, great plans offer features that could potentially lead to tens of thousands of dollars in additional retirement money. Learn the ins and outs of your current 401(k) and compare it to some of the hallmarks of a great 401(k). (AP Photo/Jacquelyn Martin, File)

(AP Photo/Jacquelyn Martin, File)

Any 401(k) can help you save for retirement. A great 401(k) allows you to save a whole lot more.

The difference between a mediocre plan and a great one could translate into tens of thousands of dollars in future retirement money. Plus, a 401(k)’s quality can show how serious a company is about attracting and retaining good workers.

That’s not to say you should leave or turn down a job if it doesn’t offer a great 401(k). But knowing how to spot a best-in-class retirement plan can help you evaluate job offers, negotiate a raise to compensate for what you’re missing and perhaps encourage your employer to make its plan better.

Here are three features of great 401(k)s.

A GREAT 401(K) DOESN’T MAKE YOU WAIT TO START SAVING

A good 401(k) comes with a company match, plenty of low-cost investment options and low fees. A great 401(k) doesn’t make you wait to take advantage of those features.

Many plans now allow participants to begin contributions immediately, with no waiting period. Others have waiting periods of one to six months. Some require people to wait a full year — the maximum allowed under federal law — and that delay can be expensive for workers.

Let’s say you’re 25, earning $50,000 a year and able to contribute 10% of your pay. The $5,000 you can’t contribute the first year, plus a typical $1,500 match you wouldn’t earn, could mean about $106,000 less in your retirement account by the time you’re 65, assuming 7% average annual returns.

If you change jobs in the future – as you almost certainly will – every waiting period you encounter could compound the damage.

A GREAT 401(K) LETS YOU KEEP THE MATCH

Plans offer a number of different matching formulas , with some of the most common being 50% of the first 6% of earnings and 100% of the first 3% to 6% of pay.

The more generous the match, the better for participants — to a point. Many plans have long vesting periods for employer contributions. You might not have a right to any matching funds until you’ve worked for the company for three years, for example. After you hit the three-year mark, you would own 100% of any match you’ve earned and 100% of any future matches.

Another common approach is a six-year “graded” vesting schedule. You might have to work two years before you get 20% of the match. You would get another 20% after each year of service until you were 100% invested in past and future matches after year six.

But long vesting periods have come under fire because of their negative impact on today’s more mobile workers . A 2016 report by the U.S. Government Accountability Office found if a worker left two jobs before vesting, at ages 20 and 40, the matches they forfeit could be worth $81,743 at retirement.

A growing number of plans give employees immediate ownership of matching funds — 44.2% in 2021, up from 38.5% in 2017, according to Hattie Greenan, director of research and communications for the Plan Sponsor Council of America.

You’re always 100% vested in your own contributions, but it’s important to understand any restrictions imposed on your employer’s contributions — and perhaps push for shorter vesting periods.

A GREAT 401(K) GIVES YOU MORE WAYS TO SAVE

Most plans today offer a Roth 401(k) option that allows participants to put away money that won’t be taxed in retirement.

Contributions to a regular, pre-tax 401(k) give you an upfront tax break, but withdrawals are taxed as income . Contributions to a Roth 401(k) don’t reduce your current tax bill, but withdrawals in retirement are tax-free. Financial planners often suggest clients have money in both pre-tax and tax-free accounts to better manage their tax bill in retirement.

The IRS limits pre-tax and Roth 401(k) contributions to $20,500 in 2022 for people under 50 and $27,000 for people 50 and older. But total contributions — by participants and their employers — can be up to $61,000 for people under 50 or $67,500 for those 50 and older, if the plan allows it.

Some plans offer the option to make additional, after-tax contributions, which can help you stuff a whole lot more money into your retirement plan.

Let’s say you’re under 50 and max out your pre-tax contributions. Your company contributes a $6,000 match, for a total of $26,500. If your plan allows, you could contribute as much as $34,500 to the after-tax option to meet the combined employer and participant contribution allowance.

Money in after-tax accounts can grow tax-deferred, which is a nice perk, but some plans offer something even better: “in plan” conversions that let you quickly move the money into Roth accounts, minimizing the potential tax bill. This combination of after-tax contributions followed by conversions is known as a “mega backdoor Roth ,” and it can be mega-helpful in piling up future tax-free funds.

___________________

This column was provided to The Associated Press by the personal finance site NerdWallet. The content is for educational and informational purposes and does not constitute investment advice. Liz Weston is a columnist at NerdWallet, a certified financial planner and author of “Your Credit Score.” Email: lweston@nerdwallet.com. Twitter: @lizweston.

RELATED LINK:

NerdWallet: What is a 401(k) plan? https://bit.ly/nerdwallet-what-is-a-401k

Copyright © The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

AP

Image: Scottie Scheffler celebrates after a birdie on the 10th hole during the second round of the ...

Associated Press

No. 1 golfer Scottie Scheffler: From the course to jail and back after Friday arrest

Top-ranked golfer Scottie Scheffler was arrested after police say he dragged an officer while trying to get around a fatal accident Friday.

18 hours ago

Photo: Seattle Times publisher and CEO Frank Blethen announced he will step down at the end of next...

Associated Press

Seattle Times CEO to step down after 4 decades in charge of family-owned paper

Seattle Times publisher and CEO Frank Blethen announced he will step down at the end of next year after four decades of leading the paper.

2 days ago

Image: Andy Jassy, Amazon president and CEO, attends an event on Aug. 15, 2022, in Culver City, Cal...

Associated Press

Comments from Amazon CEO Andy Jassy about unions violated federal law, NLRB judge rules

A federal judge ruled Amazon CEO Andy Jassy violated labor law by making certain anti-union comments during media interviews two years ago.

15 days ago

Image: Former President Donald Trump appears at Manhattan criminal court before his trial in New Yo...

Associated Press

Judge raises threat of jail as he holds Trump in contempt, fines him at trial

Former President Donald Trump was held in contempt of court at his trial Tuesday and fined $9,000 for repeatedly violating a gag order.

18 days ago

Photo: The seal of the Federal Communications Commission (FCC) is seen before an FCC meeting to vot...

David Hamilton, The Associated Press

Net neutrality restored as FCC votes to regulate internet providers

The FCC on Thursday voted to restore "net neutrality" rules that prevent broadband internet providers from favoring some sites over others.

22 days ago

southwest airlines...

David Koenig, The Associated Press

Southwest will limit hiring and drop 4 airports, including Bellingham, after loss

Southwest Airlines will limit hiring and stop flying to four airports as it copes with weak financial results and delays in getting new planes from Boeing.

23 days ago

Liz Weston: How to spot a great 401(k)