The Ultimate 401(k) Quiz

Estimated Completion Time
4 min
The Ultimate 401(k) Quiz
Image: JGI/Jamie Grill/Blend Images/Getty Images

About This Quiz

You're aware of defined contribution plans and 401(k) from your previous place of work. But you're now at a new job and you no longer want to have anything to do with your former employer. Is 401(k) for you? Will it protect your financial rights? For the latest facts, figures and important things to know, take this quiz.
Where is the name 401(k) derived from?
section 401, paragraph "k" in the American Constitution
addendum "k" to page 401 in the Internal Revenue Code
section 401, paragraph "k" in the Internal Revenue Code
The "401" is a reference to section 401 of the Internal Revenue Code. The "k" refers to section "k".

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In what year was the 401(k) plan proposed and how long did it take for the final regulations to come into effect?
It was proposed in 1981 and it took 10 years.
The 401(k) plan proposal was in 1981, but it took a full 10 years before the final regulations were in place.
It was proposed in 1990 and it took five years.
It was proposed in 1995 and it took two years.

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Under a defined contribution plan, who defines what?
The government defines the payment conditions.
The employer or employee defines the amount to be contributed.
The employer or employee defines the amount to be contributed.
The fund defines the dates of contribution and retirement payments.

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How is 401(k) different from other retirement plans regarding taxation?
Under 401(k), the money is taken off after it is taxed.
Under 401(k), the money is taken off before it is taxed.
With other retirement plans, taxes are calculated according to the gross salary, then the money is put aside. Under 401(k), the money is put aside, then the taxes are calculated, so you end up saving money.
Under 401(k), the money taken off is banked, $15,000 at a time.

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Which of these is a drawback specific to the 401(k) retirement plan?
Your employer could declare bankruptcy before you reach retirement age.
The employer matches a portion of what you contribute.
If you withdraw your money too early, you pay taxes and a fine.
If you withdraw your money before age 59½, you pay taxes and a 10% fine to the IRS.

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Is there a limit to how much you can put into your 401(k) account every year?
depending on the arrangement you've made with your employer
no
yes
Yes, there is a limit. It's referred to as the 415 limit.

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You've changed jobs and you no longer want to keep your money in your former employer's plan. What can you do?
You can roll over the money into a new 401(k) plan or keep it where it is.
You have two choices: roll over the money into a new plan or keep it where it is. In either event, carefully check into the criteria and details of each option.
You can request government permission to transfer the funds, but it is subject to approval.
You're stuck and cannot do anything about it till the age of 59½.

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If you're not sure how much money you want to put into your 401(k) account monthly, on what should you base your decision?
annual salary, Social Security number, tax bracket
marital status, job stability, family size
the state of the economy, job stability, how much money you can do without
Make your decision by bearing in mind the state of the economy, how stable your job seems and how much of your monthly salary you can manage without.

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You just received a pay raise. Meanwhile, your employer contributes a flat rate to your 401(k). What should happen now?
You should check your bank statements on a more regular basis.
The flat rate remains unchanged. You should simply increase your own contribution.
You should ensure that your employer increases his contribution.
If the employer has been contributing a flat rate, he should now raise it according to your pay raise.

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Most 401(k) plans offer _____, such as stock mutual funds.
bond mutual funds
investment choices
They usually offer a variety of investment choices. One of these is stock mutual funds.
money market accounts

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How secure are U.S. Treasury securities?
very secure, with a small, steady growth
U.S. Treasury securities are considered to be very secure, with a small, steady growth.
not very secure
as secure as any other investment choice

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In a nutshell, when you buy stocks in a company, you are buying:
a little part of that company
Buying stocks means that you're buying a little part or share of the company.
out the company
rights to make decisions in the company

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In terms of risk level, what does a conservative route entail?
high returns but a low chance of losses
high returns but a high chance of losses
low returns but a low chance of losses
That's why it's conservative -- it entails minimal risk with low returns but a low chance of losses. The less conservative the route, the higher the chance of losses.

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When choosing to invest in an index fund, such as S&P 500 index, what annual average return is considered the optimum?
8.5000000000000006E-2
0.11
An index fund with about 11% average annual returns is ideal.
0.15

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What does a fund's past performance often indicate?
the past level of risk
its future possibility for success
A fund's past performance is a common sign indicating its future likelihood of success.
the manner in which the fund was handled

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What is the advantage of diversifying one's portfolio of funds?
It balances your risk.
By diversifying your portfolio, you keep your risk in balance. When one fund goes down, another might go up so you effectively don't keep all your eggs in one basket.
It eliminates risk.
It boosts your risk.

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Economists and investors recommend having no more than what percentage of your portfolio in one stock?
no more than 10%
no more than 20%
They generally recommend having no more than 20% of your portfolio invested in one stock.
no more than 35%

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What benefit to employers get out of contributing to 401(k) plans?
It boosts their annual returns.
It helps in recruiting good employees who want to work hard at their jobs.
Employers contributing to 401(k) are benefited in being able to recruit good employees with great incentive to work hard at their jobs.
They get no benefit, but are legally required to contribute.

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What would be considered a top-heavy company investment plan?
More than 50% of the assets come from key employees.
More than 55% of the assets come from key employees.
More than 60% of the assets come from key employees.
A top-heavy plan is when more than 60% of the assets come from key employees.

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Why does the IRS mandate nondiscrimination tests every year?
to make sure that employees are aware of the plan and take advantage of it
The IRS mandates nondiscrimination tests to ensure that employees are aware of their plan, take advantage of it and receive equal benefits.
to make sure that employees are not discriminated against, according to their race
to make sure that employees comply with the pension plan laws

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