what dose "401 K" mean?

[Xen]

juist wondering, seems we hear this in relation to econmic highs and lows all the time, but I have never heard it defined, so dose anyone hear know the exact definition?

 

[Duke of Marlbrough]

You mean 401 k plan? As in a retirement plan for individuals? IIRC, it is named after the tax code that established it. Certain groups have other types of 401 plans that can have, for example teachers have a separate type of 401 plan.

 

[Xen]

thanks not sure as to any specific type, but now everything starts tomake a bit more sense now...

 

[PantheraTigris2]

I don't have a 401k plan, I have something even better... the TSP. Thrift Savings Plan. For federal employees. You don't want me to spell out the details, as it would just make you corporate types insanely jealous.

 

[Xen]

but what about us yet-to-have-a-real-job guys

 

[PantheraTigris2]

Originally posted by Xen
but what about us yet-to-have-a-real-job guys

Work for the Federal Gov't - best advice I can give.
A good way to get your foot in the door is to serve in the military first. But yeah, us Dept. of Defense employees - you wouldn't believe how easy, and how good we have it. I love tax payers. Every last one of you.

Thank you for the new de-humidifier we just got.
Thank you for the new air-purifier we just got.
Thank you for the nice new office furniture we got.

By boss went out and spent 90 thousand bucks on... whatever we wanted. More on the way...!

Thanks for the raise, thanks for the 1% bonus, thanks for the....
(ahem, you get the idea.)

I love taxes!! I love 'em! Because I take part in the benefit of them! If only you knew....

OK, now that you hate me, I'll be off for the night.

 

[JollyRoger]

401 (k) - One of the 401 ways that the Corporate nobilty take advantage of the corporate serfs. Have their retirement plan tied up in holdings of company stock and mutual funds that invest heavily in the company's stocks and bonds. Then when you are bailing out from the impending crash due to accounting fraud a la your Golden Parachute, your golf buddies will get out your lipsticked pig stock before your serfs because your serfs have restrictions on being able to sell. Worst case scenario for you? You spend a couple of years in a Federal country club and lose a small portion of the money you looted in the way of civil fines that go to the government instead of your screwed over investors or ex-serfs. Worst case scenario for your ex-serfs? Out of work with a deflated retirement account and the scarlet letter of your crimes on their resume.

 

[Shadylookin]

a 401k is so people can save up money to reitire. usually most people get them through their employer, that matches what you put into it to a certain percent. like you put in 5 percent of your income in one and they match that. The goal is so you have a lot of money saved up, and when you retire you get moved down into a lower tax bracktet so the government doesn't screw you over as much. Or at least this is what i got from my fathers incoherant babalings about finances to me

 

[Comraddict]

401k plan:

pros
-money is your you can take it anytime
- including employer match, which is usually 50-100%, you get great rate return- 45% to 125% annually
-it is pre tax money, they take out your 401k amount and then do taxes of rest, which means less taxes.


cons
- if you take it before you are 55, you pay additional 10% tax punishment
- company got to keep your money for decades, they make much more of it and basically paying you less
- company profits by keeping your money, they make much better rate of return than your official rate of return

 

[Xerol]

Four random characters slapped together by some bueracracy to confuse the people. Like "1040EZ" and such. Keep up the random letter/number combos! (Tip: Throw in punctuation once in a while! Nothing livens up tax season like having to fill out a form "40!ZZ-4" form.)

[/sarcasm]

 

[onejayhawk]

The reference is to a clause in the Federal Tax Code, number 401(k), which allows companies to deduct money from employee checks and direct it to a retirement account. This is advantageous to the employee, since the amount deducted from his pay does not count as income on his taxes that year, while the interests and dividends on the investment is sheltered from taxes until withdrawn, which increases the effictive return. In many ways it is like an IRA (Individual Retirement Account), but it allows more money to be sheltered.

There are issues. As JollyRoger says, some companies have taken advantage of the participants by making the compny stock the only investment available. When the company goes bankrupt, the people lose their retirement savings. This affects the highly paid people, the decision makers, much more severely than the hourly people, so it is rather uncommon.

The problem is that the whole 401(k) structure is a loophole. Its not a very big one really, but broadly available. Because of things like IRA's, the IRS has taken the position that they are good public policy, and has basically allowed them to exist hassle free. But, since it is a loophole, and not a law as such, there was no planning which went into the creation to protect the investors. It is because of this that the one company disaster cited above could take place. The disclosure requirements are almost non existant, and are based solely on customary and ordinary practices, rather than on code and regulation.

One thing that aggrevates me no end is that you must seperate from your employer to get access to the management of your money, which means that the options they give you are are there ever will be. Were it planned, there would be vesting periods, after which you could take the money and invest it anywhere.

All in all, it is one of those things that rich people pay their lawyers large emounts of money to find, that turns out to be useful to nearly everyone tha pays taxes. If you despise the concept of trickle down, here is a counterexample. The rich found it, but it benefits the middle class most. It is one of the no brainers in life. If they offer it to you, take it. The costs are small, and the payout, especially if you happen to be young and have little money, are big, huge even.

J

 

[JollyRoger]

Originally posted by onejayhawk
One thing that aggrevates me no end is that you must seperate from your employer to get access to the management of your money, which means that the options they give you are are there ever will be. Were it planned, there would be vesting periods, after which you could take the money and invest it anywhere.

All in all, it is one of those things that rich people pay their lawyers large emounts of money to find, that turns out to be useful to nearly everyone tha pays taxes. If you despise the concept of trickle down, here is a counterexample. The rich found it, but it benefits the middle class most. It is one of the no brainers in life. If they offer it to you, take it. The costs are small, and the payout, especially if you happen to be young and have little money, are big, huge even.

J

I agree with most of what you've said in the above post and admit my original post has been proven true in only a few notorious circumstance (with Enron being the most notorious). What I slightly disagree with is a 401(k) being a no brainer. I think it is the best thing for most people to do, but the whole paragragh you have on investment restriciions causes it not to be a no brainer.

For example, I once worked for a large bank. Of the 11 funds available to invest in (they were all managed by the investment subsidiary of the bank), all except the purely government funds had one, if not several of the bank's securities listed in its top 10 holdings. Most of the remaining top 10 were companies where the bank had significant business ties with, either as a client, investment advisor, lender, partner, or a combination of the above. The match was with the bank's stock. In addition, most incentive pay and the occassional bonus were paid in restricted bank stock. Thus one ended up very undiversified towards the bank's good or bad fortunes.

All of these funds underperformed the market, significantly due to the fact that the bank's stock underpreformed the market. At the time, I could have overcome the tax advantages of the 401(k) plus the match by opening up a taxable brokerage account and merely matching the performance of the market. However, I can almost always significantly beat the market because my risk tolerance is higher than the most people and I have an intelligently aggressive system for picking stocks and a stop-loss sytem that protects the downside while giving virtually unlimited upside on high flying stocks.

Because of my high tolerance for risk, my disciplined approach to aggressive investing, and the expectation that I will reach my retirement goal well before age 59 and a half, it makes more since for me personally to have control over my investment assets. In the five years I have been doing it, four have been years where I did significantly better (even when considering taxes and matches) than I would have in my company's retirement plan. One year was slightly worse, but that was when I didn't have the appropriate stop-loss system in place and I took significantly larger negative hits than necessary. At the moment, the market value of my brokerage account is approximately 5 times higher than if I had put the money in the best fund of my company's 401(k).

 

[onejayhawk]

JR - You must love individually managed IRA's. You can even do some option tansactions, covered calls and such.

To someone like you or myself, there are other options that we could utilize, but for 99% of taxpayers, a 401(k) is a blessing, since it encourages savings which is an historically neglected area.

J

PS Now that we are talking about it, it may be time to reallocate my fund designations.

 

[HighlandWarrior]

Originally posted by PantheraTigris2


Work for the Federal Gov't - best advice I can give.
A good way to get your foot in the door is to serve in the military first. But yeah, us Dept. of Defense employees - you wouldn't believe how easy, and how good we have it. I love tax payers. Every last one of you.

Thank you for the new de-humidifier we just got.
Thank you for the new air-purifier we just got.
Thank you for the nice new office furniture we got.

By boss went out and spent 90 thousand bucks on... whatever we wanted. More on the way...!

Thanks for the raise, thanks for the 1% bonus, thanks for the....
(ahem, you get the idea.)

I love taxes!! I love 'em! Because I take part in the benefit of them! If only you knew....

OK, now that you hate me, I'll be off for the night.

that is one of the major reasons i joined the military.

 

[Flak]

Originally posted by onejayhawk


One thing that aggrevates me no end is that you must seperate from your employer to get access to the management of your money, which means that the options they give you are are there ever will be. Were it planned, there would be vesting periods, after which you could take the money and invest it anywhere.


J

Well, I'm assuming you mean there are restrictions as to where you can move your investments. At both of my jobs where I had 401k plans, I could at anytime move my money around and diversify, as long as it was within the offered set of investments in the plan. There was always a pretty good distribution (low risk to high). I could do this at anytime online. Pretty convenient although I never used this feature.

With my situation now, I truly have no control or access. I'm working in Austria and everything retirement-wise is done through the government. Not one freakin 401 k-like plan in this entire country as far as I know. This is disappointing because I can't control what happens with that money and any 'match' (Social Security) is virutal. You have to trust the government to invest that money wisely.

I always put my 401k on the highest risk investments and made small killings, even when the markets nosedived. I heard that the Austrian government took a pretty good beating with some of it's private investments last year. Now THAT is truly not having access.

 

[onejayhawk]

You have the gist of it. I can choose from a selection of 6 stock plans, three bond plans, a guaranteed flat rate and what amounts to cash, commercial paper. That's 11 choices, which is better than average. Not one of these 11 choices is one I would have selected on my own however, and it is aggravating that until I part with the company, I will never have any of the things I would have chosen. In essense its JR's point. A sophisticated investor can do better than a 401(k) in a taxable brokerage account.

Your point about governmental entities taking beatings is dead on though. No one worth his commissions will work with a bureaucracy, so they get left with the snake oil salesmen.

J