A 401k 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 401k, 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.
In most 401k plans, participants are given a list of three to seven different options from which to choose. 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 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.
The plan administrator is responsible for setting up the 401k 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 401k investments lose money.
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 401k plan for information on what your choices are.
- IRS: Retirement Topics – Investing Plan Assets
- IRS: Definitions
- U.S. Department of Labor: 401k Plans for Small Businesses
- Electronic Code of Federal Regulations. "Title 29: Labor." Accessed Feb. 13, 2020.
- U.S. Department of Labor. "Meeting your Fiduciary Responsibilities," Pages 1-2. Accessed Feb. 13, 2020.
- Financial Services Commission of Ontario. "Responsibilities of the Pension Plan Administrator." Accessed Feb. 13, 2020.
- Government of Ontario. "Pension Benefits Act." Accessed Aug. 19, 2020.
- U.S. Department of Labor. "Meeting your Fiduciary Responsibilities," Pages 2-3. Accessed Feb. 13, 2020.