The most common type of defined contribution retirement plan,
in which employees choose to defer part of their compensation. Under
the typical 401(k), employees contribute anywhere from 1 percent
to 15 percent of their pre-tax annual salary each year to the plan.
In addition to this amount, many employers will match the employee's
contribution, such as 50 percent of up to 6 percent of the employee's
contribution. For example, if an employee contributes 6 percent
of his or her salary to the 401(k) plan, the employer will contribute
an additional 3 percent so that the employee will have saved a total
of 9 percent of his or her annual salary (i.e., 6 percent contribution,
plus 3 percent employer match). There are annual maximum amounts
that employees can contribute as well as distribution restrictions
prior to age 59.5. See also
Defined contribution plan.
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