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Financial Definitions & Other FAQs

What you need to know...Simplified

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What is a 401(k)?

  • A 401(k) is a defined contribution plan created by a business for the retirement savings benefit of its employees. 


What is a plan sponsor?

  • The plan sponsor is the employer. For example, if Microsoft offers its employees a 401(k) or other defined contribution plan, then Microsoft is the plan sponsor. 

What do I need to get a 401(k) started for my business?

  • First and foremost, you would need to have at least one employee
  • You will need a Third Party Administrator (TPA) to create the 401(k) as a defined contribution plan
  • You will need a financial advisor to help design the plan infrastructure including the fund line-up, the custodian, and the enrollment process
  • You and your financial advisor will need to select the proper custodian
  • You and your financial advisor will need to arrange a fund line-up
  • You will need to decide on whether or not your plan is a safe harbor plan
  • You will need to decide if you want your company to match the employee contributions, and how much to match them with
  • It is highly recommended you have a payroll service if you are going to begin offering a 401(k)

While the bullet points above may seem daunting, if you have a good TPA and financial advisor, most of the work will fall on their shoulders.


What is a Third Party Administrator? (TPA)

  • A Third Party Administrator will be the person or company who creates the backbone of your plan. They create the document that becomes your actual plan, which sets the rules of your plan and follows IRS guidelines for adopting a plan. The TPA can be your best friend because they keep the IRS at bay and keep you in compliance with annual reports called 5500s. The TPA will normally charge for the creation of the plan, a per-participant fee, and an annual ongoing fee for their reporting and testing services.  They work on compliance not only with the IRS, but the Department of Labor as well.

What is a Defined Contribution Plan?

  • A Defined contribution plan is when a plan participant or employee is able to contribute from their paycheck towards their retirement plan. 401(k)s are a type of defined contribution plans. There are a variety of different types, such as 403(b)s 

What is a fund line-up?

  • A fund line-up is the choice of funds available to invest within a 401(k)
  • Usually the fund line-up is condensed and limited to approximately 10-25 fund options and the line-up amount rarely goes over 50 choices. This can feel restricting to some retirement savers, which is why some plans are now offering brokerage windows which allow an investor to choose their own investments outside of the line-up.
  • The line-up is usually a decision between the plan advisor and plan sponsor. 
  • Fund line-ups should be reviewed at least annually to filter out bad fund performance and pursue better options as times, regulations, and costs change.

What is a Target Date Fund?

  • Because most plan participants are not experienced investors, and generally are not comfortable in choosing options from their fund line-ups, the target date fund was created.
  • Target date funds usually have the preferred year of retirement in their name, i.e) 2030 Target Date Fund. This means that the fund is targeting the allocations based on a time frame that the participant is planning to retire on the year listed in the fund name.
  • What the target date fund does not take into consideration is the personal risk profile of the participant.
  • More and more fund line-ups are consisting of mainly target date funds for their simplicity of selection.

Can I take money from my 401(k) before I am 59 1/2?

  • The first answer is, it depends. Each Plan design is unique and may offer different routes to withdraw funds before 59 1/2. Some of those options may have tax penalties associated with them, and the distribution is generally taxable, but please consult with a tax advisor before making a distribution from your plan.
  • Most plans allow you to take loans against the balance and this helps avoid the penalty and taxes, but you will pay interest back to the plan. Please check with your plan sponsor if this option is available to you.
  • Some plans may offer In-Service Withdrawals before 59 1/2. Please read our article on it here.
  • Another form of withdraw is a hardship withdraw, which penalty's and taxes are still owed. Not all plans offer this, so please check with your plan sponsor.

What is an employer matching contribution?

  • A company may choose to match its employee's contributions in their plans as a form of profit sharing.
  • This is not a must, but is solely at the discretion of the employer
  • When times are tough, the employer has the right to lower the match if one is existing, or take it away.

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