Section 401K of the Internal Revenue Code enabled employees to set aside earnings tax-deferred for retirement. Changes in the Fair Labor Standards Act made in 1996 will encourage smaller employers to set up 401k plans by removing complicated filing rules in exchange for employer contibutions of 3 percent of pay for workers who participate in the plan or 2 percent of pay for all workers whether or not they participate. Usually an employer will match a certain percentage of your contribution. During the 1980's, the number of Americans covered by pension plans decreased by almost ten percent. Employees using 401K plans set aside a portion of their earnings on a tax-deferred basis.
Employers usually match at least part of that contribution.
This type of retirement plan has a lot of advantages, but of course, there are drawbacks as well. Pro's of the 401k Employers gain more control of benefit costs and employees gain investment freedom and control their contribution levels. However, while a 401k plan can be an excellent retirement benefit, an individual's plan is only as good as their investments. The 401k plan guarantees nothing. Return depends entirely on how much money goes into the plan and the rate of return on investments.