401k retirement plans can sometimes seem overwhelming; and that’s unfortunate because they should not be. But when you just have a vague understanding of what you can and cannot do, it can feel overwhelming.

Your 401k plan will seem complicated if no one ever took the time to explain the basics. It can get quite frustrating when you have questions but you’re never sure who to ask. This leads to feeling like you don’t have much control over your 401k retirement account.

Believe it or not though, you actually have more control over it than you realize. The first step to gaining personal control is understanding what it’s all about. Let’s break down what areas of your 401k plan you do control and which areas you do not.

What You Do Control:

401k Contributions.

  • You have control over how much you want your 401k contributions to be.
  • You just do not control the maximum amount you can contribute, the IRS controls that.
  • You cannot exceed the maximum 401k contribution limits set by the IRS, which is $16,500 for 2010 with a catch-up contribution limit of $5,500 if you are over the age of 50.
  • For 2011, the 401k contribution limits  and catch-up contributions are the same as 2010.
  • If your employer offers matching, you should at least invest enough to receive the full match; this is a very common practice.

Allocation of your 401k contributions.

  • You have control over how you allocate your 401k contributions amongst the different funds offered within the 401k plan.
  • Most 401k plans use mutual funds as the investment vehicle.
  • You can put all of your contribution into the money market fund or break up your contribution into some stock funds and or bond funds.
  • How you invest your contribution is all up to you.

Your 401k Distribution.

  • You have some control over when you start to take 401k distributions.
  • The IRS also has some control.
  • 401k rules, set up and controlled by the IRS, stipulate certain dates that you must follow to start 401k distributions.
  • The part you have some control over is which date you want to start.
  • The IRS allows distributions to start between ages 59 1/2 and 70 1/2.

What You Do Not Control:

How your 401k contributions are processed.

  • You cannot just write your employer a check for your 401k contribution.
  • Your contribution cannot be an IRA rollover.
  • An IRA rollover is a rollover, not a contribution.
  • Payroll deductions are the only way you can make your 401k contributions.

Matching.

  • You do not control whether or not your employer offers matching as part of the 401k plan.
  • Some employers are generous enough to match your personal 401k contribution, some are not.

The match amount.

  • If your employer does offer matching, you do not control the amount of the match.
  • You do control whether or not you contribute enough to receive the full match.

DSC_0109Vesting Schedule.

  • You do not control when the employers match becomes yours; in other words,  is vested.
  • Most employers set up a vesting schedule between 3 to 7 years.
  • To receive the free money your employer gave you in the form of a match, you have to keep the assets in the 401k plan during that  scheduled time period.

The Investment Platform.

  • You do not get to decide which investments are included within the 401k plan.
  • Your employer works with the 401k plan provider to determine the investment funds offered in the plan.
  • It is the fiduciary responsibility of the 401k plan sponsor (your employer) to select investment options for the plan that offer diversity and cover all asset classes.
  • Most 401k plans use mutual funds as the investment platform.
  • Most plan sponsors do a very good job at offering a diverse selection of investments.

Rollovers

  • You do not control whether or not a 401k plan accepts rollover money.
  • Some 401k plans accept 401k rollovers from other 401k plans, some do not.
  • If you change jobs and your new employer’s 401k plan does not accept rollover money, you always have the option of rolling your account balance into an IRA.

Loans

  • You do not control whether or not a 401k plan offers 401k loans.
  • Even though 401k loans are allowed by law, employers are not required to include them in the plan.

401k plans seem complicated and overwhelming until you break down the pieces; then you can feel more in control.  Hopefully all of the information we presented takes away the overwhelming feeling you had about 401k plans.