What is a 401(k) plan?

A 401(k) plan is an employer-sponsored retirement savings plan, which allows employees to save a portion of their paycheck before taxes are taken out. This type of plan enables workers to invest in a range of investments, including stocks, bonds, and mutual funds, which can grow tax-deferred until they are withdrawn during retirement.

The key feature of a 401(k) plan is that it is initiated by the employer, who may also choose to match employee contributions up to a certain percentage, which can significantly enhance the employee's savings. This structure provides both a way to save for retirement and an incentive for employees, as they can take advantage of tax benefits and potentially employer matching contributions.

In contrast, while an individual retirement account (IRA) is another common retirement savings option, it is not employer-sponsored and has different contribution limits and rules. A government-run pension scheme typically involves benefits that are provided by governmental organizations, such as Social Security, rather than through an employer-sponsored plan like a 401(k). Lastly, a 401(k) is not related to life insurance policies but rather focuses on retirement savings and investment growth. These distinctions help clarify the defining characteristics of a 401(k) plan.