How does a 401(a) retirement plan work?


Quick Answer

A 401(k) plan is a type of retirement plan that is offered by an employer as a benefit to an employee, usually with the employee dedicating a specific amount of money to the plan with each paycheck and the employer often contributing a matching amount, reports CNN Money. The employee chooses an amount to contribute to the plan upon enrollment.

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Full Answer

With most 401(k) plans, the employee opts for a level of contribution based on a percentage of normal pay, advises CNN Money. In addition, employees usually have options for how they wish to invest the money they contribute. In time, the employee can adjust the amount of money invested from his pay and make changes to how he wishes to invest it, based on the plan's options. An employee may also select a risk level for the investments he makes with his 401(k), and change the acceptable risk level in time, such as taking on more risks early in his career and making less risky investments in the years leading up to retirement.

Most employers offering 401(k) plans do not manage the plans offered, but instead allow the external companies through which plans are obtained to manage them, based on the employees' instructions. Some employees offer stock as part of the 401(k) options.

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