Some years ago almost every company paid pension to its employees through a company paid pension plan. People stayed on one job for their entire career and companies felt it was their duty to provide this type of loyalty after retirement as well. The major benefit of having a pension was that the employee didn’t need to contribute. It was a gift. Companies still were willing to help you after retirement, but they looked for other vehicles to do it. And so came the 401k plan.
The 401k became the preferred method for most (non-union) companies to help employees invest for the future. The employer really has no responsibility he only has to select a financial institution, usually a brokerage house, to manage the plan. Even though many companies have a contribution plan where they provide an additional percentage of your own contribution, there is no law saying they need to. In today’s financial climate most companies either don’t contribute, or they contribute very little.
Even though the concept of a 401k is attractive, not all plans are worth the investment. Many employees choose not to participate in their company’s plan because after doing some research they may find that the funds (mutual funds) have not performed well.
When you do contribute to a 401k, you are using pre-tax dollars. If you need to make an early withdrawal (before age 59) you will be penalized and taxed at your regular rate.
If you should change jobs, don’t forget about your 401k. Talk to a financial adviser to “roll it over” into a new 401k at your job, or roll into a Roth IRA.