Smartmoney's site has an excellent selection of topics and advice for working with your 401(k) plan, for both people who are new to this financial instrument, and those who have been participating in one for many years. Highly recommended.

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HOW MUCH do you know about your 401(k)? Probably not a lot. If you're like most people, you choose a contribution level and review your balance when the statement arrives. But that could be dangerous. If you don't understand the policies of your plan, you just might stumble into traps that could seriously devalue your retirement stash. Before you fall prey to a costly mistake, read on.

1. Be prepared to wait five long years for your company match.
You might think that your company match is making you rich. But you may be surprised to learn that if you leave your firm before, say, five years is up, you won't get a penny of it. This type of vesting schedule is called a five-year cliff, and it is frighteningly common. As many as 31% of companies use it, according to KPMG's "Retirement Benefits in the 1990s: 1998 Survey Data."

"Five years is too long. I'd like to see that [federal] limit shrink to three years," says Ted Benna, president of the 401(k) Association. Amen. In this market, where many employees jump from company to company chasing higher salaries and increased opportunity, five years at one company is nothing short of an eternity.

But, perhaps spurred by high turnover, more employers are using long 401(k) vesting schedules to retain their employees. In fact, immediate vesting is on the decline. In 1995, 30% of the companies surveyed by KPMG offered it. Today, it's only 20%.

What can you do if you work for a company that makes you wait? Grass roots action. See our article "7 Ways to Lobby for a Better 401(k)," for ideas on how you can work to change your company's plan. Oh, and it pretty much goes without saying, if you're itching for a new job after four and a half years, it's probably in your best interest to hang tight for six more months.

2. If you take a loan then leave the company, you'll have to pay the loan back -- pronto.
Sure it's nice to know that you can always borrow from your 401(k). But be warned: If you quit, are laid off, or fired, you're probably going to have to pay that loan back immediately. "You might be obligating yourself to pay back that loan at one of life's worst times," says David Wray, president of the Profit Sharing/401(k) Council.

What happens if you can't repay the loan? It will be treated as an early withdrawal. That means you'll owe taxes plus a 10% penalty. Bottom line? Think long and hard before borrowing. Your own 401(k) account could turn out to be the harshest collector you've ever encountered.

3. If your account is less than $5,000 when you leave the company, you could get cashed out.
If your account holds less than $5,000, then be prepared to roll over your money when you leave your company. Otherwise, your company could cash you out. (If your account is more than $5,000, relax. Your former employer must let you keep your money where it is -- if that's what you really want to do.)

Now, being cashed out is not necessarily a big deal. But you'll save yourself a big headache if you tell your employer where you want your 401(k) assets to go when they're rolled over. That way the employer can make out the check to your IRA trustee (broker or mutual fund company) or your new employer's 401(k) plan. Otherwise, your former company will make out the check to you. In that case, the firm will withhold 20% for taxes. You'd get that money back when you file your tax return next year. But meanwhile, you've got to replace it, otherwise you'll face income taxes and a 10% early withdrawal penalty.

Being prepared will also help you meet the 60-day requirement for rolling over your 401(k). What happens if you don't reinvest the money within 60 days? Your account will be treated as an early withdrawal, which means -- you guessed it -- taxes plus a 10% early withdrawal penalty. And there's no going back. After 60 days that money is yours, you cannot reinvest it in a rollover IRA or a new 401(k).

4. You may be charged a load to buy your mutual funds.
If you work for a small company, you may be paying sales charges to buy the mutual funds in your 401(k) plan. This is unacceptable. These fees often shave 4% off everything you invest. Or you could be paying 12b-1 fees that take as much as a percentage point out of your returns each year. Add to that some of the other fees that employers pass along to their employees -- such as investment transaction fees and even record keeping fees -- and suddenly that company match becomes less attractive.

What should you do if you are paying sales charges? Lobby your employer to switch to a no-load 401(k) provider like Fidelity Investments or Vanguard Group.

5. You may be stuck buying tax-advantaged investments in a tax-deferred plan.
Talk about a belt and suspenders. There are actually plenty of plans out there, especially 403(b) retirement plans for nonprofit organizations and schools, that offer tax-advantaged investments, like variable annuities. This is pointless. Your retirement plan is already tax-deferred. There is no point settling for the lower returns and higher costs of a variable annuity to get tax-deferral there as well.

"It's unfortunately too common in 403(b)s," says Benna. "Some small employers make investment decisions based on a relationship with an insurance provider or someone else's recommendation."

So what can you do? Ask your plan administrator if you can transfer (tax-free) part or all of your account into a 403(b)7 account. These accounts are invested directly in mutual funds, without the insurance wrapper, says Janet Anderson, an associate at benefits consultant William Mercer. But you need to proceed with caution. First of all, make sure you do a trustee-to-trustee transfer (otherwise you risk the early withdrawal penalty). And if your annuities are subject to surrender fees, for example, then the most you will be able to transfer penalty-free from your account is just 10% annually.

(Reprinted from http://www.smartmoney.com/ac/401k/index.cfm?story=5things) SmartMoney.com © 2000 SmartMoney. SmartMoney is a joint publishing venture of Dow Jones & Company, Inc.and Hearst Communications, Inc. All Rights Reserved.