Some provisions of your 401(k) plan are dictated by ERISA, the federal law that governs qualified retirement plans. For example, plans must cover all eligible employees and treat them equitably. Other details are specific to each individual plan. That’s why, if you move from one job to another, each with a 401(k), some things will seem familiar and others different.
Each plan has a sponsor, usually your employer. The sponsor decides which factors determine your eligibility, what percentage of your salary you can contribute to your plan, whether to match your contributions and which investments will be available within your plan. The plan administrator keeps track of the company’s 401(k), handling management details and making sure that the plan runs smoothly. Your sponsor also chooses your plan provider, typically a financial services company that offers investment products, plan administration and record-keeping services.
Within the guidelines set by the law, 401(k) plans are largely self-directed. You decide how much you would like to contribute to your plan, how you would like to invest—or reinvest—those contributions within the limits of your plan’s investment menu, and eventually how you would like to handle withdrawals from your account.
The federal government caps the amount you can contribute to your account each year. In 2011, the annual limit is $16,500. If you are 50 or older, you can make an additional catch-up contribution of $5,500, for a total of $22,000. The annual contribution limit is increased periodically to reflect increases in inflation, but not every year.
You are also responsible for the investment results you achieve, though your employer has the obligation to offer appropriate investment alternatives.
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