Essential 401k Information

There are many options to choose from when saving for retirement. One of the more popular options available today is the 401k account. A 401k account is simply a retirement account that is funded by a participant's employer. The funds are usually invested into mutual funds or into the shares of company stock.

A 401k account falls under the category of a defined contribution account. This means the employee will contribute a defined amount to a participant's account. The defined contribution account is different than the defined benefit account, which includes such retirement plans as pensions. In the case of pensions, a set benefit amount would be disbursed monthly upon retirement. However, 401k accounts dole out a lump sum upon retirement.

The trend in retirement savings is gradually going more towards defined contribution accounts, as most companies are saving money offering these 401k-like plans. Although roughly half of the American population has some type of retirement savings, such as a 401k account, many do not utilize all the benefits available to them to make it worth their while. The advantages of having a 401k account are many, including having the company match contributions, being able to withdraw funds if deemed necessary, and having the headache of investing put into the hands of professionals. However, these benefits can be negated if individuals don't begin contributing to their own 401k account soon after starting a new job, contribute too little, or choose not to participate at all.

There are no set in stone rules as to what percentage of income a participant should contribute to a 401k account, since incomes vary as well as individuals' different retirement needs. The thinking of some experts is that an individual should have saved about 10 times their average yearly salary by the end of their career and start of retirement. Many people fall vastly short of that mark because they underestimate how long they will live into the future as well as the toll that inflation will have on their monthly living expenses. Therefore, the contributions made to the 401K account run out prematurely.

There are some pitfalls to contributing to a 401k, paying excessive fees and costs, participant becoming the investor at retirement, and others. The benefits of contributing to a 401k account are much greater than any risk involved. Participants must ask questions to their funds managers and human resource officers to make sure they have the correct plan for them.