Perhaps the most popular retirement plan being elected today, a 401(k) retirement plan is a type of defined contribution plan. In this type of defined contribution plan, the employee can make contributions from his or her paycheck before taxes are taken out. The contributions go into a 401(k) account, with the employee often choosing the investments based on options provided under the plan. In some plans, the employer also makes contributions, matching the employee’s contributions up to a certain percentage. The essence of the 401(k) plan is that the employee chooses to reduce the amount of salary or he or she receives as cash in favor of contributing to the individual’s retirement account.
401(k) plans also allow employees to make contributions on a pre-tax basis. Thus, employees can avoid paying taxes on their deferred income until distribution at retirement. The contributions and investment assets also grow tax-free.
Employers and plan administrators are required to disclose certain information about plan and investment costs to workers (and their beneficiaries) who direct their own investments in ERISA-covered 401(k) and other individual account retirement plans.