Become a better investor
Lesson in Course: Finance at work (beginner, 5min )
Most employers offer retirement plans for our benefit, but what are they?
When saving for retirement, where we decide to sock away our retirement savings makes all the difference. Retirement accounts allow us to buy investments that will grow faster than if we left our cash in a savings account or under our mattress.
The retirement accounts offered through our employer, usually either a 401(k) or 403(b), are great options. The names 401(k) and 403(b) refer to sections of the tax code set by the IRS.
For-profit companies normally offer us a 401(k). We can set up our 401(k) as part of the onboarding process when we start a new job or by reaching out to human resources any time. HR will provide the details about the company's 401(k) plan, and they'll help us make any changes.
Even though our company offers the plan, a third-party plan administrator, usually a mutual fund company, handles our account. We can log into their website to see all of our account details, even if we no longer work for that employer.
401(k) plans are defined contribution plans, which means we can choose to have our employer deposit some of our salary into a retirement account on our behalf.
They'll make our contributions per pay period. We set the contribution amount as a percent of our annual salary or sometimes a flat dollar amount. Some employers will even match our contributions up to a certain amount. Yes, a company match is basically free money!
A 403(b) has the same basic structure as a 401(k) plan; however, the main difference is that nonprofit and government employers offer 403(b) plans.
The providers and administrators for 403(b) plans are typically insurance companies. As a result, most 403(b) accounts have more limited investment options and offer more annuity products than 401(k) accounts.
While 403(b) plans legally allow employers to provide employer matches, most employers do not offer them. Employer matches for 403(b) accounts could mean losing certain government exemptions that enable these plans to have lower administrative fees.
Something else to keep in mind is that if we have over 15 years of service with certain nonprofit or government agencies, we might be able to make additional catch-up contributions to our 403(b) plans that 401(k) plans can't provide.
Setting up a contribution amount for our employer's retirement plan is a convenient way to save for retirement. This eliminates having to transfer funds into an account from our paycheck ourselves. Also, we should try to contribute enough to maximize our employer match if we have one. Otherwise, we'll be leaving some of that free money on the table!
Employer-sponsored retirement plans that allow us to choose to have our employer deposit some of our salary into a retirement account on our behalf.