A 401(k) plan is named after the Internal Revenue Code section from which such a plan was born. In its pure essence; it is a company sponsored retirement plan that allows employees to place a portion of their earnings into a tax-deferred savings or investment account, to help in planning for retirement.
Employees are usually given the option to select from different mutual fund choices. Ideally, they base their selection on retirement goals and objectives and risk tolerances. Such options might include diversified equity funds, fixed income funds, and money market funds - among others - and might even include company stock.
- Tax benefits: Retirement plans reduce your taxable income.
- Matching contributions: Many employers will match contributions.
- Accessibility: Borrowing against your account
- Investment management: The employer is responsible in determining the investment options available, the employee decides allocations
- Flexibility: The ability to move your portfolio to a new employer