Facts on 401(k)s

Among the basics to keep in mind about 401(k) plans:

• Employees’ contributions to 401(k) plans are made with pretax dollars. Amounts withdrawn are taxable; withdrawals made before age 59½ are also subject to an early distribution penalty.
• Account balances can be rolled over to other types of tax-advantaged retirement accounts under certain circumstances. After leaving an employer, for example, a former employee can roll over his or her contributions and earnings on those contributions to another qualified retirement plan or a traditional individual retirement arrangement, and, if the former employee was vested in the plan, can also roll over the employer’s contributions and earnings. Vesting often occurs completely after three years of employment or incrementally over five years. Employers’ decisions to match or contribute are voluntary.
• Federally approved defined contribution plans similar to 401(k)s are also available for specific categories of employers. For example, 403(b) plans can be established for employees of educational institutions and charitable organizations. Similarly, 457(b) plans can be set up for employees of nonprofit organizations and of state and local governments.
• Financial planners have some basic rules of thumb for retirement planning. One is that you need to have 10 times your final year’s salary in your 401(k) to be secure. Another: You need to save, by yourself or with employer assistance, 9 percent of your salary each year for 25 years. “The average person needs at least $600,000 at retirement, but fewer than 10 percent have more than $200,000,” says Jane White, president of Retirement Solutions LLC in Madison, N.J.
• At the end of 2008, the average 401(k) account balance was $86,513 and the median was $43,700, according to the Employee Benefit Research Institute. Just over half (54 percent) of respondents to the institute’s latest Retirement Confidence Survey reported the total value of their household’s savings and investments—excluding the value of their home and any defined benefit plan—as under $25,000. Only 11 percent reported savings of $250,000 or more, down from 12 percent the previous two years.

The author is a contributing editor of HR Magazine, a lawyer and a professor of management studies at Marist College in Poughkeepsie, N.Y.