In the US, 401(k) is a plan for workers to save for their retirement. These savings will be invested while deferring from any current income tax payments on the saves earnings until it is withdrawn. The employee can choose to have a part of his/her income to be paid directly to his/her 401(k) plan. This payment is called a contribution.  Most 401(k) retirement plans are sponsored by the employers. The employers have the option to match all or part of the employee’s contribution by adding into the employee’s account or by offering a profit sharing to the plan. The most common option that is chosen is the participant-directed plan. This plan lets the employee choose from various investment options and is typically a mix of mutual funds that consist of market investments, bonds and stocks. Some companies also have the option of buying company stocks.

401(k) is a benefit for employees, therefore only employers can sponsor it. A self-employed person can also start his own 401(k) and so can a non-profit organization. 401(k) is a salary reduction retirement plan, meaning an employee can choose to have a percentage of his pay to contribute to the 401(k). In a profit-sharing plan, your employer will contribute 10% of profits annually. In a money purchase pension plan, the contribution is 10% of the employee’s yearly income. If the employee leaves his job, his 401(k) will still remain active. Some companies charge a fee for maintaining an ex employee’s 401(k) account. If the employee gets another job in another company, then he/she can choose to “rollover” his 401(k) into a new one hosted by his new employer. Most employers advise against withdrawing from the 401(k) account while the employee is still in the company or is under the age of 59. If the employee insists on withdrawing early, his savings are subject to excise tax that can equal to 10% of the amount withdrawn. There is a limit to yearly employee salary deferral. This is known as “401(k) limit”. The limit in 2008 was $15,500, and has no risen to $16,500. Future limitation will be set according to inflation.

In other countries, 401(k) does not mean anything. This is just a term used in the US alone.