A 401(k) is a type of retirement plan that allows employees to contribute before-tax dollars into an account that builds until they reach retirement age. When you contribute to a 401(k), you put a percentage of your income in, and you don’t have to pay taxes on that money, or any money that it earns, until you take it out of the plan, normally at retirement.
The choices you can make regarding what to do with your money are determined by your specific plan but usually involve investing in 401(k) individual stocks.
Basics of 401(k) Plans
In most 401(k) plans, participants are given a list of three to seven different 401(k) individual stocks that they can choose from. These are typically a mix of stocks and bonds and are designed to provide the investor with a range of choices including everything from slow, steady growth to a rapid accumulation of money.
Each type of investment has its risks as well as benefits, and it is the responsibility of the plan administrator to make sure participants understand the potential hazards of each type of investment. The largest retirement plan providers will offer their plan participants a great selection.
Restrictions on 401(k) Investments
The IRS places restrictions on the investment choices you or your plan administrator can make. You are not allowed to invest in such things as art, gems or antiques. There are also restrictions on some types of coins and precious metals. Investing in alcoholic beverages is not allowed. Additional limits are placed on employer-owned property and company stock that can be included as part of the investment.
The intent is to protect investors from potentially questionable investments.
Plan Administrator’s Responsibilities
The plan administrator is responsible for setting up the 401(k) plan according to government guidelines. Part of this is to make sure the plan obeys all applicable rules and regulations, but it also involves the administrator making prudent and cautious selections of the properties and securities in which the plan invests.
The Employee Retirement Income Security Act of 1974, known as ERISA, says that the administrator must exercise the level of judgment he would use if the investments were his own. Provided he meets these requirements, neither the plan administrator nor the company will be held responsible if the 401(k) investments lose money.
Individual Investment Choices
In virtually all cases, you are allowed to choose your investments from a list of choices that the plan provides, but this does not include allowing you to select individual stocks. You will probably be able to choose the type of stocks you want and whether or not you want to invest in your employer’s stock, but it is unlikely that you will be able to narrow down your stock choice any further than that. Since plan specifics vary greatly, check the details of your 401(k) plan for information on what your choices are.
Read More: TSP vs. 401(k)