Question: How does a 401k work ?
Is it like an ira were I pick my own stock/etf/bound.etc Or is it more like a mutual fund?
Are there fees with a 401k? If so what are they ?
I work at target and the offer a 401 k plan. I just want to know something about 401k before I ask them question so I don't sound like an idiot who they can rip off .
Thank you .
Answer:
I don't think you know what an IRA is either. An IRA can be invested in mutual funds, stocks or any number of things. Generally 401k accounts offer only mutual funds (some may offer stock in the company you work for, I would stay away from that). Your employer deducts a certain percentage (per your request) off your paycheck. They may or may not have a matching program where they kick something in as well, that is a good question to ask. The fees in a 401k are generally hidden - there may be some funds that have a sales load, stay away from those as well. Sometimes they take a small percentage out of your account each year for fees.
The investment offerings depend on the plan - each plan is different. Some have relatively limited offerings (say 8 to 10 mutual funds) some have unlimited offerings (stock,s funds, etc.). The Summary Plan Description will provide information on what is offered.
There fees involved, and again, they vary. Usually, the fees are taken out of the returns of the plan as a whole, and again, they will tell you what the fees are and have averaged over the past few years.
In most cases, a 401(k) is better than an IRA due to the company match, which is basically free money to you.
Basically your employer offers a 401k plan. Inside the plan are a bunch of mutual funds that the plan offers and you can choose from. These mutual funds are operated by fund companies which charge a management fee. You don't actually see this management fee because the fees automatically come out of the performance of the fund.
The advantage to a 401k is that your employer will usually match contributions that you make up to a certain amount. In other words Target will give you free money for some of what you contribute to the plan.
The disadvantage to a 401k is that your investment options are limited to what is inside the plan and nothing else. Typically 401k plans only offer 5 or 10 mutual funds, so you don't have a lot of options. What you get is what you get.
Typically people will only contribute just enough to their 401k so that they meet the maximum match from their employer and get as much free money as possible. After that, people will usually put their savings into their own IRA. You can open up an IRA with any bank, mutual fund company, insurance company, or brokerage firm that you would like so you have an infinite number of options as to how you want to invest your money. You can invest in stocks, bonds, mutual funds, ETFs, whatever.
The reason your employer offers a limited number of funds in the 401k is because they don't want some employee to go out and invest all their retirement savings into some speculative penny stock that ends up going bankrupt inside the plan. If this were to happen, the employee could potentially sue the employer for allowing this to happen.
Read the plan documents to learn more about fees and Target's contributions to your plan. Information should be available about the mutual fund choices within the plan and their fees and objectives. The more you know about this stuff the better off you are. Don't be afraid to ask Target any questions you have about the 401k plan. They don't make any money off of the fees you are being charged in the plan - only the mutual fund companies and the 401k provider do. Target's objective is to offer you a 401k plan as a form of compensation to motivate you to work there and keeping working there.