401(K)S: Your Retirement Investment Powerhouse?

A 401(k) is a defined contribution plan that is a cash or deferred arrangement. Employees can elect to defer receiving a portion of their salary which is instead contributed on their behalf, before taxes, to the 401(k) plan. Sometimes the employer may match these contributions. A 401(k) is turned over to the retiring employee, who takes on the rights and responsibilities of managing the balance of the account.

401(k) vs. pension

A 401(k) is a defined contribution plan that is a cash or deferred arrangement. Employees can elect to defer receiving a portion of their salary which is instead contributed on their behalf, before taxes, to the 401(k) plan. Sometimes the employer may match these contributions. There is a dollar limit on the amount an employee may elect to defer each year. An employer must advise employees of any limits that may apply.

Employees who participate in 401(k) plans assume responsibility for their retirement income by contributing part of their salary and, in many instances, by directing their own investments. Employees choose the specific investments held within their 401(k) accounts from a selection offered by their employer. Typically, investment offerings include stock and bond mutual funds and target-date funds designed to reduce the risk of losses as the employee approaches retirement.

A pension is paid out from a fund retained by the employer. If all of its retirees live to age 120, or the fund experiences investment losses, it's the company's problem. A 401(k) was originally intended to be a supplement for traditional pensions, rather than as a replacement. It's rare to have both today. Pensions are disappearing from the private sector.

Target-date funds are the way “you’re least likely to make mistakes," Lazaroff said. These accounts contain a mix of stocks, bonds, and other securities that are adjusted as your chosen date approaches, generally shifting toward more conservative investments as you near retirement.

Several factors influence the pace and extent of your 401(k)’s growth, including the amount you contribute annually, any company matches, investment performance, and the time until you retire. Most employers now offer a Roth 401(k), also known as a designated Roth account. Contributions to Roth accounts are made with after-tax dollars, which means you don't get a tax deduction. Instead, your money can potentially grow tax-free and be withdrawn in retirement without any taxes.

Investment options

A 401(k) is a defined contribution plan that is a cash or deferred arrangement. Employees can elect to defer receiving a portion of their salary which is instead contributed on their behalf, before taxes, to the 401(k) plan. Sometimes the employer may match these contributions. There is a dollar limit on the amount an employee may elect to defer each year. An employer must advise employees of any limits that may apply.

Employees choose the specific investments held within their 401(k) accounts from a selection offered by their employer. Typically, investment offerings include stock and bond mutual funds and target-date funds designed to reduce the risk of losses as the employee approaches retirement. An employee’s account holdings may include guaranteed investment contracts issued by insurance companies and sometimes the employer’s own stock.

Target-date funds are the way “you’re least likely to make mistakes”, Lazaroff said. These accounts contain a mix of stocks, bonds, and other securities that are adjusted as your chosen date approaches, generally shifting toward more conservative investments as you near retirement.

Each 401(k) plan tends to offer different investment options, including mutual funds, exchange-traded funds (ETFs), target-date funds, index funds, money market funds, and individual stocks and bonds.

Most employers now offer a Roth 401(k), also known as a designated Roth account. Contributions to Roth accounts are made with after-tax dollars, which means you don't get a tax deduction. Instead, your money can potentially grow tax-free and be withdrawn in retirement without any taxes. To avoid penalties and/or taxes on withdrawals, you must hold the account for at least five years and be older than 59 1/2 (age 55 if you separate from your current employer).

Target-date funds

These funds are one of the easiest and least risky routes to take for many people. Several factors influence the pace and extent of your 401(k)’s growth, including the amount you contribute annually, any company matches, investment performance, and the time until you retire.

Employees can elect to defer receiving a portion of their salary which is instead contributed on their behalf, before taxes, to the 401(k) plan. Sometimes the employer may match these contributions. There is a dollar limit on the amount an employee may elect to defer each year.

A 401(k) was originally intended to be a supplement for traditional pensions, rather than as a replacement. It's rare to have both today. Pensions are disappearing from the private sector.

A 401(k) Plan is a defined contribution plan that is a cash or deferred arrangement. Employees who participate in 401(k) plans assume responsibility for their retirement income by contributing part of their salary and, in many instances, by directing their own investments.

Guaranteed investment contracts

A 401(k) plan is a defined contribution plan that is a cash or deferred arrangement. Employees can elect to defer receiving a portion of their salary which is instead contributed on their behalf, before taxes, to the 401(k) plan. Sometimes the employer may match these contributions. There is a dollar limit on the amount an employee may elect to defer each year. An employer must advise employees of any limits that may apply.

Employees who participate in 401(k) plans assume responsibility for their retirement income by contributing part of their salary and, in many instances, by directing their own investments. Employees choose the specific investments held within their 401(k) accounts from a selection offered by their employer. Typically, investment offerings include stock and bond mutual funds and target-date funds designed to reduce the risk of losses as the employee approaches retirement. An employee’s account holdings may include guaranteed investment contracts issued by insurance companies and sometimes the employer’s own stock.

A 401(k) was originally intended to be a supplement for traditional pensions, rather than as a replacement. It's rare to have both today. Pensions are disappearing from the private sector. A 401(k) is turned over to the retiring employee, who takes on the rights and responsibilities of managing the balance of the account. If the retiree spends all the money, or if the investments lose value, it's that person's problem alone. A pension is paid out from a fund retained by the employer. If all of its retirees live to age 120, or the fund experiences investment losses, it's the company's problem.

Company match

A 401(k) plan is a defined contribution plan that is a cash or deferred arrangement. Employees can elect to defer receiving a portion of their salary which is instead contributed on their behalf, before taxes, to the 401(k) plan. Sometimes the employer may match these contributions. There is a dollar limit on the amount an employee may elect to defer each year. An employer must advise employees of any limits that may apply.

Employees who participate in 401(k) plans assume responsibility for their retirement income by contributing part of their salary and, in many instances, by directing their own investments.

Target-date funds are the way “you’re least likely to make mistakes,” Lazaroff said. These accounts contain a mix of stocks, bonds, and other securities that are adjusted as your chosen date approaches, generally shifting toward more conservative investments as you near retirement.

Several factors influence the pace and extent of your 401(k)'s growth, including the amount you contribute annually, any company matches, investment performance, and the time until you retire.

Most employers now offer a Roth 401(k), also known as a designated Roth account. Contributions to Roth accounts are made with after-tax dollars, which means you don't get a tax deduction. Instead, your money can potentially grow tax-free and be withdrawn in retirement without any taxes.

Frequently asked questions