401(k) / 401k Definition

An employer-sponsored, defined contribution, retirement plan. It is named after the section of the IRS code which defines the plan. The savings plan allows workers to save for retirement by making tax-deferred contributions. Usually, the contributions are withheld from the employee’s paycheck, and usually they are matched in part or in whole by the employer. Employer matching funds are usually subject to some period of vesting.

Most 401(k) plan savings are invested in mutual funds emphasizing stocks, bonds and money market investments. Most plans allow the employee to select a portfolio of mutual funds from a large set of offered funds. In general, taxes are paid on 401k plans as funds are withdrawn at or after retirement. Funds may be withdrawn prior to retirement, but when this done the disbursement usually is subject to penalties and full taxation.