401(k)

By Entrepreneur Staff

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401(k) Definition:

A retirement plan for employees that allows them to put part oftheir pre-tax salary in an account. The funds may not be withdrawnuntil employees retire without paying a penalty.

401(k) plans take their name from the section of the federal tax code that provides for them. These plans let employees set aside a percentage of salary tax-free every year. As a kicker, the funds grow tax-free until they are withdrawn. 401(k) plans are very popular benefits with employees because they allow employers to essentially pay workers more without that income being taxed. 401(k) plans are quite popular with employers because most of the contribution comes from the employees and not the company.

The Employee Retirement Income Security Act of 1974 (ERISA) governs the way 401(k) plans are set up and managed. There are many responsibilities that go along with setting up a 401(k) plan. For instance, employers must determine the investment options employees will get to choose from and monitor the investments' performance as well as the service provided by whomever is administering the plan. ERISA exists to make sure any fees charged for the plan are "reasonable."

You can learn more about 401(k) plans at the Department of Labor's Pension and Welfare Benefits Administration website.

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