5 Ways to Protect Your 401(k) — Including from Yourself
How to make sure your retirement money will be there for you when you need it
If you have a 401(k) plan where you work, most or all of your retirement savings may be in it. While you might not need that money for decades, it’s worth keeping a close eye on. Here are five smart and simple precautions to take to safeguard your investment.
1. Check your payroll deductions against your 401(k) deposits. Most 401(k) plans operate smoothly, but in some rare instances employee contributions will fail to show up in the account. The reason might be simple human error or deliberate theft. So it’s wise to check your 401(k) account statement against your paystubs or other record of how much money you contributed.
Employers are required by law to transfer your contributions to your 401(k) plan in a timely matter. Though the rules vary by the number of participants in the plan, this generally means as soon as the employer is able to separate that money from its own assets but no later than the 15th business day of the month following the date you received your paycheck.
Your plan is required to send you an account statement at least quarterly in the case of participant-directed plans (the kind where you choose which investments to put your money into) or at least annually in the case of plans where a plan trustee makes those investment decisions.
2. Watch out for employer shenanigans. It’s unlikely that your employer or plan administrator will steal your 401(k) contributions, but it does happen. So in addition to verifying that all of your contributions have been deposited, you’ll want to watch for some other hints of trouble.
The U.S. Department of Labor, which regulates 401(k) plans, has a list of 10 warning signs on its website. For example, if your account statement is always late, comes at irregular intervals or never arrives at all, that should be a cause for alarm or at least a call to your company benefits department or plan administrator. Similarly, if your account suddenly drops in value for no obvious reason related to market volatility, you should ask for an explanation.
If you have any suspicions and can’t get a straight answer from your employer, you may want to contact the Employee Benefits Security Administration.
3. Leave a forwarding address if you change jobs. When you change jobs you may have several options for your 401(k) plan. In some cases, you can leave it in your old employer’s plan, transfer it to your new employer’s plan, roll it over into an IRA or cash it in — a bad move for reasons we’ll explain later.
You might choose to keep your 401(k) where it is if you believe the plan is well managed, your new employer doesn’t offer one or you don’t feel comfortable managing your own IRA. If you do leave your 401(k) behind, make sure your ex-employer knows how to reach you, especially if you relocate. Even if you take your 401(k) with you, it’s a good idea to make sure your old employer knows where to send your tax forms and any other important paperwork.
4. Avoid borrowing from your 401(k). Depending on the rules of your plan, you may be able to borrow money from your 401(k) for up to five years. While that idea might be tempting, it has major drawbacks. For one, the money you borrow is no longer compounding tax-deferred toward your retirement — meaning your ultimate nest egg could take a significant hit. For another, if you leave your job, willingly or otherwise, your loan must generally be paid back within 60 days. The IRS explains the basic rules on 401(k) loans on its website.
5. Don’t cash it in, except as a last resort. If borrowing from your 401(k) is usually a bad idea, withdrawing the money can be an even worse one. Not only will you have to pay income tax on the withdrawal, but in most cases you’ll be subject to an additional early withdrawal penalty of 10 percent if you are younger than 59 ½. What’s more, the money won’t be there for you when you retire, a fact you may come to regret in later life. So unless you absolutely need the cash and have no other alternatives, it’s best to leave it alone and let it grow.