Years ago, almost every employee in every company received a pension under a pension plan paid for by the company. People have stayed with the same job throughout their careers, and companies have felt it their duty to provide them with this kind of loyalty after retirement. The main advantage of having a pension was that the employee did not need to contribute. It was a gift. Then life changed, as did American businesses. Companies were always willing to help after retirement, but they looked for other ways to do it. And so came the 401k plan.
401k has become the preferred method of most (non-union) companies to help employees invest for the future. The employer really has no responsibility other than choosing a financial institution, usually a brokerage, to manage the plan. Although many companies have a contribution plan in which they provide an additional percentage of your own contribution, there is no law requiring them to do so. In today’s financial climate, most businesses do not or contribute very little.
There is an annual threshold of $ 15,000 per person, regardless of your salary. You can choose which funds to invest your money in, but you are of course limited to the funds available from the brokerage operating the 401k employee plan.
While the concept of a 401k is appealing, not all plans are worth the investment. Many employees choose not to participate in their company’s plan because after doing research they may find that funds (mutual funds) have not performed well.
When you contribute to a 401k, you are using pre-tax dollars. If you have to make an early withdrawal (before age 59), you will be penalized and taxed at your normal rate.
If you need to change jobs, don’t forget your 401k. Talk to a financial advisor to “roll it” into a new 401k at your job, or roll into a Roth IRA.