Title: Reading: (CU2 M3) 401K Plans
Course: SkillsCom BA 224 15.1 > Section: Credit Unit 2 Module 3

This article discusses at length the full process of creating a 401k. You will find a number of videos that reinforce the concepts presented in this reading. Please watch these. For example, at the end of the introduction on page 1, there is a short video from an investment professional at Putnam Investments who talks about how Americans are hurting their financial futures by using their 401ks during the economic crisis that began in 2008. On page 2 of the article, you will find an illustrative chart as well as various financial calculators that will help you enhance your understanding of the financial impact saving and investing your money will have on your future. Although some of the information contained in the article is a bit outdated, the general premise of a 401k is described well.

How 401k's work (Webpage)

Additional Information to Review:

- Pension plans are classified in three ways: contributory versus non-contributory plans, qualified versus non-qualified plans, and defined contribution versus defined benefit plans. The employee contributes to the contributory pension plan, while the employer makes all contributions to non-contributory plans.
- With defined benefit pension plans, employees know ahead of time the pension benefits they will receive. The benefit is "defined" or specified by amount or formula. In contrast, defined contribution pension plans specify what contribution the employee and/or employer will make to the employee's retirement or savings fund.
- A 401(k) plan is a defined contribution plan and a savings and thrift plan. Employees invest by making pretax salary deductions, and the plans are usually administered by investment firms. A 401(k) contribution does not replace the Social Security tax.
- In any savings and thrift plan, employees contribute a portion of their earnings to a fund, and the employer usually matches this contribution completely or in part. The 401(k) plan is one example of a savings and thrift plan.
- Cash balance plans are hybrid plans because they combine the portability of defined contribution plans and the predictable benefits of defined benefit plans. Cash balance plans have the portability advantages of defined contribution plans.