401k Investments - Mechanics of 401K Investments

The 401K is a retirement account specially designed for employees who are desirous of an easy way to save as well as fund investments while enjoying tax advantages on its income. Contributions to the 401K are done automatically via salary deduction. In most cases this is matched by your employer, going as high as 25 percent of your contribution.

Your contributions, together with your co-employees' contributions are administered by the employer or his designate. 401K administrators have the responsibility of preparing the annual 401K plan from which day-to-day operations decisions are based. This plan determines the shape which your 401K investments will take to enable you to bring about the retirement you envision for yourself.

The responsibility of informing 401K participants regarding the plan, your benefits and the expected outcome of your 401K investment likewise falls under the purview of 401K administrators. Traditionally, 401K funds are invested in mutual funds in brokerage houses. These brokerage houses, on their part, invest the funds into stock, bonds and the money market. Brokerage houses are professionally managed by securities experts who do research, keep abreast of stock market developments and are in charge of buying and selling financial instruments.

It is evident that opting for this manner of 401K investments provides the employer, who is tasked with 401K fund administration, the most straightforward method of administering your 401K funds. Mutual funds provide for investment diversification that increases the capability of the funds to increase its income. This results into better profits that you can enjoy when you retire.

In addition, the traditional 401K investments into stocks, bonds and comparable financial instrument makes asset conversion into cash much easier. And because your company's 401K funds are comprised of multiple accounts including yours, the needs of each account owner will vary from one the other. Employees in extremely serious situations such as those requiring immediate medical attention can make qualified distributions from his account which can easily be processed if investments are made in traditional assets. Participants making hardship distributions are not unheard of in 401K accounts.

In addition, retirement ages do not come at the same time across the company; hence some employees will retire and make withdrawals earlier than the others. Termination of employment also requires the termination from the 401K and to tie up the monies in non-traditional 401K investments will likely cause liquidity problems for the fund should the terminated account be refunded its contributions.

Such a scenario is probable when 401K investments are made in non-traditional physical assets such as real estate and precious metals. These tangible assets, although equally lucrative and can provide for a more stable investment, cannot be easily liquidated because they require a seasoning period to allow the value to increase.

When making a comparison of IRA vs 401K it is crucial that you make an complete assessment of what your retirement plans are before jumping into the world of IRA investments. Having the advantage of receiving matching employer contributions cannot be ignored aside from the offer of a competently managed account where fees are spread across all accounts in the fund. Fees incurred in managing an IRA account will be borne only by your account, which can amount to a large sum.

Therefore, it would be practical to make a careful evaluation of your options vis-a-vis your retirement goals in order for you to get the best suited retirement account - 401K or IRA. Financial advisors can make this crucial decision much easier. Find one now!

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