The 401(k) retirement plan is funded by worker contribution and a corresponding employer contribution. The main characteristic of the plan is that the contributions are taken from pre-taxed wages. The fund accumulates tax-free pending its withdrawal. The majority of businesses and tax-exempt organizations can generate these retirement plans.

The 401(k) derives its name from the IRC (Internal Revenue Code) of 1978. The function of the 401(k) is administered by the EBSA (Employee Benefits Security Administration) of the Department of Labor.

The 401(k) plan has a large number of advantages. Primarily is that the worker can contribute pre-tax funds that reduce the tax paid in each payday. In addition, the company contribution and any growth in the fund are free of tax until it is withdrawn.

The compounding of the fund throughout a 20 to 30 year period is somewhat astounding. The worker has a great deal of control in the course of the upcoming contributions. When the company matches your contributions, it adds a little extra on top of your own share. All the funds in the plan can be transferred from one company to another not like pension.

Pension laws protect the 401(k) plan since it is a personal investment plan. It includes safeguards from garnishment by creditors but not from household cases that include child support.

There are a number of disadvantages in the 401(k) plan; it is difficult to acquire your 401(k) contributions prior to age 60 (59 1/2 to be exact). The 401(k) is not insured by the PBGC (Pension Benefit Guaranty Corp). Moreover, the company contributions do not start to happen until a definite number of years of service have been rendered. The rules affirm that the company’s corresponding contributions must either be a 3-year 'cliff' plan (100 percent after 3 years) or a 6-year 'graded' plan.

Employees participating in a 401(k) plan have numerous options for investment, most of the time a listing of mutual funds. The mutual funds typically consist of money market fund, treasuries, stock funds and bond funds. Several of the plans may include investing in company stock and US Savings Bonds. The employee gets to decide how the savings is invested. The employee can also choose at any time to halt the contributions.

Financial advisers frequently state that the standard 401(k) contributor is not aggressive with their investment options. Stocks have traditionally outperformed other types of investment; given that the 401(k) is a long-term investment it should be able to lessen the stock fluctuations.