Thanks, Terry. I guess I didn't remember that not everybody knows what a 401(k) program is. 401(k) refers to section 401, subsection k of the Internal Revenue Code.
As Terry says, it's a program that's not managed by the government, but rather is a tax exemption on funds individuals invest for their own retirement. A 401(k) can be invested in almost anything, with the exception of insurance policies and a few other minor instruments. I've seen cases where a person declared his car a 401(k) investment. It does not have to be a mutual fund or any other type of financial fund, though a vast majority of 401(k) funds are invested in such to a total of about $4.5 trillion currently in 401(k) funds.
Companies often offer a selection of funds that employees can invest in. If an employee chooses to do so, the employer will often match some or most of that investment, giving an even bigger boon to an employee's savings. My company, for instance, offers a number of Fidelity Mutual Funds for my 401(k). An employee by no means has to invest in those funds. That's just a perk employers often give. An employee may choose to invest in almost any outside instrument. The matching is a big incentive to invest in the funds recommended by the employer. Note that the employer does not manage those plans, but merely offers them for matching purposes as an employment incentive. Fidelity Investments has a big family of mutual funds, not all of which are offered by my company for matching purposes.
The attraction in the 401(k)'s, besides tax-deferral, is the control an individual has in the funds. It is your choice to invest nothing or up to 15% of your gross income. You are free to invest more than 15% in retirement funds, but those additional funds are not considered a 401(k) and would be taxable as a standard investment. And you can invest in virtually anything you choose. It's the freedom of choice that's good. You can choose to be aggressive by investing in stocks, bonds, or commodities when you're young. Or you can play it safe by investing in a safe money market fund or dividend-paying Treasury bond fund if you're nearing retirement age. The bottom line is that you make all the decisions. This new proposal would take away that choice and make retirement exclusively a government-run business. And we all know how wonderfully Social Security has been run. It'll start going bankrupt in 2017 since the "trust fund" has been raided by the government and all of its funds spent in the general budget. There is no trust fund. Polls frequently show that more people believe in UFO's than believe that Social Security will be there for them when they retire. Mark me as one of those who doesn't believe Social Security will be there when I retire. Therefore, I'd consider Social Security II to be as solvent as Social Security I. It's just another 5% tax hike plus the loss of deductibility of 15% of my income to be spent in the general fund.
The only involvement government has in these plans is in its taxability. Normally, government will tax any gross income. The 401(k) provision of the tax laws exempts up to 15% of an individual's gross income from taxation if it's invested in a 401(k) plan that grows tax deferred until it is drawn upon at retirement. If an individual draws from a 401(k) before age 59 1/2, the government penalizes the individual 10% of the proceeds, plus any taxes owed on that money.
The government does not manage any 401(k) plans at all. I think that's where the confusion came in. Sorry, Marcus, for the misunderstanding.
