Simply stated, a 401-K plan is a qualified pension plan that allows plan participants the opportunity to contribute pre-tax dollars to retirement accounts through a salary reduction agreement. Immediate gains are realized if the employer matches employee contributions, these contributions are discretionary and the employer may use a vesting schedule to protect their interests.

401-K plans have become very popular since their inception in 1978 and allow employers to stay competitive in today's tight labar market. More than 250,000 companies have a plan in place, covering over 29 million employees and currently over $ 1.5 trillion is invested in 401-K's. These numbers are growing rapidly and are expected to continue as employers move away from more rigid and less appreciated pension plans such as defined benefit and defined contribution plans.

401-K plans allow the company to attract and retain the best employees, help your employees plan for retirement, and the owners can also take control of their own financial futures.

For the employee, contributions are made through easy and regular payroll deductions, employees can defer federal and in most cases, state taxes. Investment decisions are simplified; normally the employer has selected 6- 12 investment choices ranging from conservative money market funds to riskier growth funds. The plan administrator should set up the sub accounts (investment choices) with diversity in mind there should be outstanding choices available regardless of your age, financial goals and requirements, and risk tolerance.

Contributions are made on a pre-tax basis and the employee defers the associated taxes for these funds. Taxes will be payable as funds are withdrawn and certain penalties will apply if funds are accessed prior to age 59 ½ - you should contact your tax advisor for any matters of this type.

It is important to understand that these programs are most suitable for long term investing and if the money you deposit will be needed in the short term, a 401-k plan is not a suitable place for it.
   

Virtually all insurance companies, banks and investment houses offer them, plans tend to look alike and hundreds of choices are available.

First, understand and compare plan fees, start up charges, and rear end or surrender fees. How much will it cost to get started, how much to run the plan each year, and if you terminate or switch the program, how much will it cost to get out the agreement?

The Department of Labor offers an very readable and understandable guide to understanding plan fees which is available on the internet at http://www.dol.com or you can call our offices for a free copy.

Two basic plan types are bundled and unbundled. With a bundled plan, you have one source for investments, plan administration, and IRS filing responsibility. These plans are easier to administer and finger pointing is eliminated as you have one contact, get one bill, one set of statements, etc. . . .

An unbundled program requires an actuarial or third party administrator working in conjunction with an investment company or insurance carrier. This approach can be unwieldy if the players are chosen haphazardly and disputes or problems can be more difficult to resolve with the dual sources of responsibility.

In either case, ask for references and call them - this will be your best source for finding out how well and smoothly the plan runs.