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401(k) Plans

Officially, these are cash or deferred profit sharing plans, more often referred to as “401(k) plans,” after the section in the Internal Revenue Code, discovered by a pension consultant in 1978, that provided a tax loophole permitting the creation of these plans. Under 401(k) plans, participants contribute portions of their earnings (which are matched or enhanced by employer contributions) to private pension accounts. Participants elect to receive direct cash or stock payments from the employers or choose to have them contributed to a trust. All taxes on the contributions, as well as any investment earnings, are tax deferred until the funds are withdrawn at retirement. Like ESOP plans, 401(k) plans put “many eggs in one basket.” That is risky and yet may prove extremely profitable.

Inside 401(k) Plans