What is a 401(k)? The name is derived from the Internal Revenue Code established in 1978. It's presently administered by the government section called the Employee Benefits Security Administration, also known as the EBSA.
A 401(k) plan is a plan usually used for retirement and is funded by an employee contribution. Some companies will match the contributions up to 100% of the employee's contribution and yet some companies do not offer any matching funding. The BNSF Railroad is one of these such companies that does not offer even a $1 match for their employees.
The funds are contributed from the employee's paycheck BEFORE taxes. The fund will accumulate completely tax free until it is withdrawn. Most businesses or companies have these retirement plans in place or they can create them.
There are a lot of advantages of having a 401K plan:
1. Employees can contribute pre-tax money which helps reduce the tax owed from their paychecks.
2. Any company contributions are also tax free until withdrawn.
3. As the funds are compounding, you are attaining a good profit on your invested funds.
4. The money you have funded in the plan can be moved around from one company to another. This isn't available in a pension.
5. Your 401K is also protected from garnishments and is protected by pension laws because it is a personal investment plan. The only time it is not protected from garnishments is in domestic caes or cases of child support, but it IS protected from creditors.
6. You can borrow against your own 401(k) and the payments you make are put back into your own account along with the interest. The interest you pay on the loan is paid to you as well. You are actually borrowing the money from yourself and paying yourself back with interest. Most plans only allow you to borrow up to 50% of your fund account and only 2 loans at a time. You can borrow more than once if you find yourself in a financial hardship.
You should note that it is hard to get your contributions, (aside from a loan), before the age of 60 without paying a lot of penalty fees. The penalty fees can take a lot of the interest profit you may have received over the years. The plan is not insured by the Pension Benefit Gauranty Corporation, also known as the PBGC.
You do have many options for investing in your 401K plan. You will usually be investing in mutual funds. This helps protect you from having all your eggs in one basket. Mutual funds can consist of:
Money market funds
Since the 401K plan is a long term investment, it should be able to handle market fluctuations without damage to your fund. Since stocks usually outperform other types of investment this is a great option for retirement security.