What is a 401k? How to get the best!

Best 401k ideas - What is a good way to make the most.

For beginners let's explore exactly what is means to have an employer sponsored plan as such.  

401k's are the most common form of a defined contribution retirement plan.  Well that's a mouthful let's look at this is sections:

1. DEFINED = You choose what percentage of your payroll earnings is 
2. CONTRIBUTION = or contributed (directly by your employer) into your 
3. RETIREMENT = account- that is a special way of savings TAX FREE for the future
4. PLAN = Your employer sets this "plan" up with certain features and possible benefits(like an employer match.  It is managed by a third party company.

Here's an example say you want to contribute 5% out of your paycheck towards your future retirement.

You make $500/week.  So right off the top 5% or $25 goes directly into the plan.  Best part is you are only taxed on $475 in earnings now so the net effect on your take home pay is LESS than the amount you are having withheld.  

The best 401k plans - aggressive employer matching!

Many new potential workers are increasing seeking out employers that have excellent matching benefits for their plan.  A common formula will have the employer MATCHING the contribution up to a certain percentage like 5% or so.  

The best plans allow higher matching contribution amounts as well as matching the SAME amount the employee puts in right off the bat.  One way employers limit there financial outlay is to only match 50% or so of what the employee puts in knowing that the more an employee has to put up, in order to receive the maximum match the less likely it is they will contribute.

Features of the best 401k plans by employers

• Instant Vesting - simply means that the money your employer puts in is YOURS immediately, no waiting period for how the money is invested or used.
• High Matching Percentage - Employers with a high matching percentage, DOLLAR FOR DOLLAR are the best meaning they match 100% of what you put in. Top tier company's are now matching in the 7%-10% range of an employees salary.
• No Limit Contributions - Some employers will limit the amount of your salary you can put into the 401k plan.  The best have no limit - this can be handy especially later in life when you or your spouse may not need the income from your job but you are eligible for "catch up" contributions.
• As you go Employer Matching - There are a few larger companies lately that in order to save some cash flow have instituted policy's of funding the employers matching contribution in one lump sum at the end of the year. All other things being equal this is NOT GOOD for two reasons 1)  You do not get to earn returns on your employers match as the year go's                                 2)  If you leave you often don't get the money you would have been due
• LOW PLAN COST - Yes the company managing the money you and your employer are forking over does not work for free.  There are cost associated with investing the money even if you choose everywhere it goes.  The best 401k plans have very low cost typically under .5%
• Range of Choices - Look for a 401k plan offering lots of options to invest your money.  Many mutual funds etc..   Additionally if you want a professional managing your plan for a fee it's nice to go to a company that has this as an option.  
• Non Elective Base Contributions - This is where an employer is mandated by the plan to put in a certain percentage of an employees pay whether or not the individual decides to contribute or not.  Although we'd rather see a higher matching amount this can be good too.