401(k) Plans

401(k) Plans

Variations in 401(k) plans

How the 401(k) plan was "invented"

How 401(k) plans work

Employer matches - your best investment

Why companies offer matching contributions

Variations in 401(k) plans

IRS provides minimum requirements that all 401(k) plans must meet, but many features are optional or left to the discretion of the plan administrator

Very difficult to make general statements about all plans

How the 401(k) plan was "invented"

Started as a loophole when a small section {401(k)} of Internal Revenue Code became effective in 1980

Many companies originally thought the concept was an illegal loophole that the IRS would disallow

Became quite popular after IRS issued regulations in 1981

Now over 17 million workers participate in over 200,000 different 401(k) plans

95 percent of large employers offer 401(k) plans

75 percent of eligible employees participate in 401(k) plans

How 401(k) plans work

Worker saves lesser of $9,500 or 15 percent of salary on an income-tax-deferred basis

$9,500 figure indexed with inflation

Savings still subject to Social Security and Medicare tax, however

Employer matches - your best investment

Vast majority of companies provide some kind of match

Most employers provide a match of 50 percent or more

With employer match of 50 percent, you get an instant return on investment of 50 percent

You can't beat this anywhere!

Why companies offer matching contributions

Nondiscriminatory rules for 401(k) plans mean that highly compensated employees can't contribute maximum to plan unless most people participate in the plan

Employers offer match as a carrot so that lower income workers will participate