What is a 401(k) plan?

A 401(k) plan is a defined contribution retirement savings plan offered by employers that allows employees to save and invest a portion of their paycheck before taxes are taken out. This type of plan often includes the option for employers to match contributions, providing an additional incentive for employees to save for retirement. Contributions to a 401(k) are typically made through salary deferrals, and the funds grow tax-deferred until withdrawal, usually during retirement when the individual may be in a lower tax bracket.

The structure of a 401(k) allows for a range of investment options, such as stocks, bonds, and mutual funds, which helps employees diversify their retirement portfolio. This plan is specifically designed to encourage long-term savings and investment for retirement, making it a crucial component of many Americans' retirement strategies.

In contrast, the other options do not accurately describe a 401(k) plan. A type of mutual fund for young investors is not specific to the employer-sponsored retirement context, while a state-sponsored pension plan refers to a different retirement system managed by the state. Lastly, a financial product for short-term savings does not align with the primary purpose of a 401(k), which is to foster long-term wealth accumulation for retirement.