Question

One of the big advantages to a 401(k) plan is that ______?

1) 401(k) plans are rare enough that they are very valuable
2) the plan automatically increases in value by 500

Answer 1

The major benefits of a 401(k) plan include employer and employee contributions, tax-deferred growth, a diverse range of investment options, portability of the account, and protection against inflation as compared to fixed-income pension plans.

Step-by-step explanation:

Advantages of a 401(k) Plan

One of the big advantages to a 401(k) plan is the combination of employer contributions, the opportunity for employee contributions, and the tax-deferred growth of investments within the account. Unlike traditional pension plans, known as defined benefits plans, 401(k)s are defined contribution plans where both employers and employees can contribute a fixed amount regularly. This allows the account to potentially grow through a diverse range of investment options. The value of a 401(k) increases based on the real rates of return on the investments made, and one of the unique features is its portability; the account can be transferred if the individual changes jobs. Moreover, 401(k) plans help to mitigate the effects of inflation on retirement savings, as opposed to the fixed income provided by traditional pensions.