An employer-sponsored retirement plan is a type of investment plan that allows employees to save for retirement with help from their employer. This term can refer to several different types of plans, but one of the most common is the 401(k) plan.
In the 401(k) industry, an employer-sponsored retirement plan works like this:
- An employee can choose to defer a portion of their pre-tax salary into their 401(k) account. Some plans also allow post-tax contributions.
- The money in the account is then invested, typically in a selection of mutual funds, stocks, bonds, or other assets.
- The funds in the account grow tax-free until retirement, at which point withdrawals are taxed as ordinary income.
- Many employers offer a matching contribution up to a certain percentage of the employee’s salary. This is essentially “free money” that helps the employee’s retirement savings grow even faster.
- 401(k) plans are subject to certain regulations by the IRS, including limits on how much can be contributed in a year and penalties for early withdrawals before a certain age (usually 59 1/2).
Other types of employer-sponsored retirement plans include 403(b) plans for non-profit employees, 457 plans for government employees, and the Thrift Savings Plan for federal employees. These plans work similarly to 401(k) plans but have their own specific rules and regulations.
In all cases, the goal of an employer-sponsored retirement plan is to encourage long-term savings and provide financial security in retirement. The 401(k) industry, which includes financial advisors, investment companies, and retirement plan administrators, supports these goals by managing these plans and helping participants make informed investment decisions.