What is the function of a 401(k) plan?

A 401(k) plan serves as a retirement savings vehicle that enables employees to contribute a portion of their earnings on a pre-tax basis, thus providing immediate tax advantages. Contributions made to a 401(k) are often matched by employers, which further enhances the savings potential for employees. The funds invested in a 401(k) can grow tax-deferred until withdrawal, typically during retirement, at which point they may be taxed as ordinary income. This structure encourages individuals to plan and save for their future financial needs, making it an essential component of many people’s retirement strategies.

The other options do not reflect the primary purpose of a 401(k). Life insurance serves a very different financial protection role, short-term savings goals typically require more accessible and liquid funds, and fixed income guarantees are generally associated with different types of pension plans rather than the investment nature of a 401(k).