What is a 401(k) plan?

A 401(k) plan is accurately described as a retirement savings plan that is sponsored by an employer. These plans allow employees to save and invest a portion of their paycheck before taxes are taken out. One of the key features of a 401(k) is that contributions are often matched by the employer up to a certain percentage, which incentivizes employees to participate and enhance their retirement savings. The contributions and any earnings on investments grow tax-deferred until withdrawals are made during retirement.

Other choices contrast with this definition: a government-sponsored retirement program typically refers to systems like Social Security, which is not employer-specific. A personal investment account for retirement would imply a more individual-managed approach, often outside of employer influence, such as an IRA (Individual Retirement Account). An educational savings plan is designed specifically for funding educational expenses, such as a 529 plan, and does not serve the purpose of retirement savings. Understanding these distinctions helps clarify why a 401(k) plan is specifically linked to employer sponsorship.