What’s the Difference Between 401(k)s?
One company’s 401(k) is not the same as another’s. The differences can mean a lot to the employee.
AOL chief Tim Armstrong had to backtrack on changes he announced to the company’s 401(k) plan when he blamed critically ill babies for high expenses that necessitated cost-cutting. Really? Setting aside his terrible justification for the 401(k) change, it highlighted the fact that companies can, and do, change their 401(k) plans.
Each company writes its own rules for its 401(k) as long as they conform to the legal framework known as ERISA, and other sections of the Internal Revenue Code. (The very name “401(k)” is the section number of the Internal Revenue Code.) Those laws allow considerable leeway.
AOL was trying to change the timing of its contributions to employee accounts to once-a-year, in January. If an employee left the company at any time during the year, say December 15, she would receive no match at all for the year. Other companies do this now, including IBM and Charles Schwab, Inc.
If you’re thinking about switching jobs, check your own company’s rules about the timing of their match, and look into your future company’s plan as well.
Eligibility and Vesting. Companies are allowed by law to delay participation of a new employee in a 401(k) for up to a year, and delay vesting of the company contribution for as long as 6 years on an increasing timetable, e.g., 20% vested after 2 years, 40% after 3 years, etc.
Company Match & Limits. The amount of the company match varies considerably from company to company, and some companies are required to impose limits for highly compensated employees’ contributions because of fairness tests.
Loan Provisions. Some companies allow loans from a 401(k) and might require a departing employee to pay the loan in full at termination, or face tax penalties for a declared distribution.
Roth Option. Many companies provide a Roth 401(k) option that can be a good choice for lower income workers, but it’s not required.
Investment Choices. Some companies provide good investment options; others, frankly, are terrible, with high costs and poor diversification.
These issues also pertain to the non-profit organization’s version of the 401(k), the 403(b).
The difference between a “good” 401(k) and a “bad” 401(k) can mean tens or hundreds of thousands of dollars over a career.
So before you leave your current job, or decide on a new company, be sure to look at all the 401(k) details.