Are you a college grad entering the workforce? Or are you looking to transition from one job to another? Either way, there’s a lot of information to take in during the application and interview processes. One of the most important pieces that tend to get overlooked is the employee-sponsored retirement plan (ESRP).
Healthcare, life insurance, and disability are definitely important benefits, but we need to make sure we are securing our future financially. That’s where your retirement investing comes in.
Here are five investing questions that need answers before taking your new, cushy corner office.
WHAT’S THE RETIREMENT PLAN?
401(k) is an employee-sponsored retirement plan offered by many corporations and most commonly known retirement plan. Essentially, money is deducted from your paycheck (pre-tax) and deposited into an investment account with your employer’s preferred financial institution. The 2016 maximum amount you can contribute is $18,000 if you’re under the age of 50 and $24,000 if you’re age 50 and older (Subject to change annually per the Internal Revenue Service).
You may start taking money out of your 401(k) at the current retirement age of 59½, but if you decide to retire before then, Uncle Sam says you have to pay a 10% penalty although there are some “hardship” exceptions to this rule.
The biggest reason you’re encouraged to participate in ESRPs is the tax-deferred component. The idea is that once you enter retirement, you’ll be able to survive on less income placing you in a lower tax bracket so you’ll pay fewer taxes than if you were to have had that money years and years ago.
403(b) is another form of employee-sponsored retirement plan offer by many government and tax except groups like schools, hospitals, and churches. This plan works exactly like a 401(k) in terms of contributions, taxes, and penalties; however, there may be some limitations in terms of how your money is invested prior to taking any withdrawals.
Most jobs will offer one or the other and you shouldn’t be worried as to which one. Just make sure one is available.
WHAT’S THE COMPANY’S MATCH?
A company match is a superb benefit when deciding to take a new job or not. After you find out if you will be utilizing a 401(k) or 403(b); next you’ll want to know what’s the company match.
A company match is exactly how it sounds. Whatever amount you contribute from your paycheck to your ESRP, your job will contribute that same amount up to their maximum value (there’s usually a cap).
There are typically two methods:
a. Dollar for Dollar
Example: Employer ABC will match your contributions 100% up to 5% of your paycheck. This means if you make $1,000 gross and contribute $50 to your plan, your employer will also contribute $50 for a total of $100. Anything over your $50 contribution will not be matched.
b. Dollar for Dollar (Staggered)
Example: Employer ABC will match your contributions 100% up to 3% and 50% up to an additional 2% of your paycheck. This means if you make $1,000 gross and contribute $50 to your plan, your employer will also contribute $30 + $10 [(0.03 x $1,000) + (0.02 x $1,000 x 0.5)] for a total of $40 making your overall contribution $90. Anything over your $50 contribution will not be matched.
If your potential job doesn’t offer a match, look into other options they may offer like profit sharing and stock options. Remember, a match is like free money. Take it!
WHEN WILL MY ACCOUNT BE FULLY VESTED?
So you take the job and you’re excited about your company match, but there’s a catch: you have to be fully vested to receive your job’s contributions in the event you were to leave or retire.
Many employers have a vesting schedule. Be sure to ask what that schedule is prior to accepting the job. Vesting schedules range in your time required to receive full benefits. Some companies will have you 100% vested in your first year while taking up to four or five years to be fully vested in other organizations.
For example, Company ABC has the following vesting schedule:
1 year of service = 25% vested
2 years of service = 50% vested
3 years of service = 75% vested
4 years of services = 100% vested
This means that whatever your employer contributes to your ESRP, you will only receive the appropriate percentage based on how many years you worked at that job prior to leaving or retiring.
WHO IS THE COMPANY MANAGING MY ACCOUNT?
Okay, now you know what type of ESRP you have, how much your job will match in terms of contributions, and how long it will take to become fully vested. But the next question is who is monitoring your portfolio?
Is it a well-known wealth management firm or one you’ve never heard of? What are their fees to manage your account? What kind of “extras” and services do they offer?
Another important question to ask here is, “Do I trust these people with my money?”
WHAT IS MY ACCOUNT ACCESS?
There’s not much to this point except knowing that you can access your account at anytime and anywhere. There’s nothing like being able to check on your money on your time.
Accepting a new job is a big deal when it comes to career planning, but also financially. If you’re in a position to start a new job or have even started the job already, make sure you can answer the aforementioned questions without hesitation. Simply search your company’s website or contact Human Resources.