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

The 401(k) plan has a lot of advantages. First and foremost is that the employee can contribute pre-tax money that reduces the tax paid in each paycheck. Also, the company contribution and any growth in the fund is free of tax until withdrawn.

The compounding of the fund during a 20 to 30 year period is quite amazing. The employee has a lot of control in the direction of the future contributions. When the company matches your contributions, it adds something extra on top of your own money. All money in the plan can be moved from one company to another unlike pension.

The 401(k) plan is protected by pension laws since it is a personal investment plan. It includes protection from garnishment by creditors but not from domestic cases that include child support.

There are some disadvantages in the 401(k) plan, it is hard to get your 401(k) contributions before age 60 (59 1/2 to be exact). The 401(k) is not insured by the PBGC (Pension Benefit Guaranty Corp). Also, the company contributions do not kick in until a certain number of years of service have been given. The rules state that company matching 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 many options for investment. In most cases a listing of mutual funds. The mutual funds usually include money market fund, treasuries, stock funds and bond funds. Some plans may include investing in company stock and US Savings Bonds. The employee gets to choose how the savings is invested. The employee can also choose at any time to stop contributions.

Financial advisers usually say that the average 401(k) contributor is non-aggressive in terms of their investment options. Stocks have historically outperformed other types of investment, since the 401(k) is a long term investment it should be able to minimize the stock fluctuations.

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According to a recent study by human resources firm Hewitt Associates, most employees didn’t rebalance or re-allocate their 401(k) portfolios in 2004. Only one in six actually made a transfer within their 401(k) accounts that year.

The study, which examined more than 2.5 million employees eligible for 401(k) plans, also found that many participants were taking on too much risk by investing a significant portion of their savings in a single stock. Company stock was the single largest holding, accounting for approximately 27 percent of participants’ total 401(k) balances. And more than a quarter of employees held half or more of their total 401(k) balances in their employer’s stock.

While some employees took on too much risk by investing heavily in company stock, other employees didn’t invest aggressively enough. The study found that workers in their 20s invested less in equities than workers in their 30s.

Now there’s help for investors who don’t have either the time or the expertise to manage their own 401(k) investments. Defined contribution plan providers such as AIG VALIC, Fidelity Investments, Great-West Retirement Services, Merrill Lynch, the Principal Financial Group and TIAA-CREF have partnered with Chicago-based Ibbotson Associates to manage participants’ accounts.

Eligible participants who elect the service will have their money allocated to a customized portfolio that is rebalanced regularly and adjusted over time to reflect the investor’s changing life circumstances.

“401(k)s are becoming the primary savings vehicle for retirement in this country,” says Roger Ibbotson, chairman and founder of Ibbotson Associates and finance professor at the Yale School of Management. “With so much riding on your 401(k) account, it’s very important to get professional, unbiased advice.” – NU

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In terms of its investment customization and flexibility, 401k retirement plans offer employees and workers an extensive array of options and preferences as to how their property and assets are invested through time. Moreover, many businesses and companies permit employees to obtain company stock for their 401k retirement plan at a cut rate. However, many pecuniary consultants and counselors are not in favor of holding a significant percentage of your 401k plan in the shares of your boss or manager.

So what are 401k plans? If you are like most people, you probably have questions about your 401k retirement plan. You may be wondering how a 401k actually takes place, precisely what a 401k retirement plan is, or how you can be capable of stimulating the diminishing balance in your 401k plan. So how does a 401k plan actually work? If your company offers a 401k retirement plan, you can agree to join. You can also have the selection option of choosing the amount of funds you wish to put in from an inventory of funds presented in the 401k plan. Your payment will routinely be deducted from your pay check before taxes.

Every worker can invest up to a defined proportion of his wage into a 401k plan. Your involvement, along with any coordinated contributions from your employer, are then endowed into your chosen funds. These funds will produce interest before being taxed, and can be withdrawn when you reach 60 years of age. At this point in time, you must pay the income tax on the withdrawn funds. Furthermore, there are methods and means wherein you can pull out your funds before age 60. However, these early withdrawals frequently call for a penalty in conjunction with the payment of taxes.

A 401k retirement plan is an employer-subsidized retirement plan, and it is categorized into two groups: defined benefit and defined contribution. With this defined benefit plan, the employer pledges to give a distinct sum to those who want to retire and those who meet specified eligibility standards and measures.

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