One of your primary sources of retirement income generally comes from private savings and investments. A defined-contribution plan provides you with an easy and painless way of creating this portion of your retirement fund.

A 401(k), named after the enabling section in the Internal Revenue Code, is a defined-contribution plan and has become the retirement plan of choice for many private companies. If you work for a non-profit organization, this type of plan is referred to as a 403(b). For purposes of this article, we'll call both of these retirement plans 401(k)'s. A 401(k) is a retirement savings plan that is primarily funded by you, the employee. Your employer will contract with a fund manager to administer the plan, but, as the owner of these funds, you are responsible for specifying how these funds are invested. This is quite different from the more traditional pension plan that most of our older relatives and some of our friends have today. For more information on pension plans, see the related article listed below. Another important aspect of the 401(k) plan is that many employers will match a portion of the money that employees allocate. Remember that 401(k)'s are retirement plans and can carry penalties for early withdrawals, so make sure you have carefully planned for your investment.

Most 401(k)'s are funded through payroll deductions. If your employer matches, this amount is credited at the same time your payroll deduction goes through. Employer match programs vary widely, but there are some common approaches. For example, some companies will match, dollar-for-dollar, the amount you invest. If you contribute $50 per paycheck, your employer also credits your 401(k) with $50. Other employers will cap their contributions so they will only match your investment up to a certain amount. No matter what level of match your employer makes, you should try to take full advantage if you can. It's like getting a bonus every time you get paid!

Your employer will probably have a fund manager that takes care of your 401(k) plan. However, you are the one who decides how your money is invested, based on several choices the fund manager offers. If you are conservative, you'll likely choose low-risk investments in bonds or treasury certificates. If you are more of a risk taker, you may choose some aggressive growth and income stocks. To learn more about investing and allocating your investments wisely, read our related articles referred to in the Library.

As with any investment, you stand to lose principal if your investment decisions go awry. Make sure your allocate and diversify your investment choices to minimize the possibility of principal loss. 401(k) funds are tax deferred. This means you do not pay taxes on your earnings until you use them during retirement.

401(k)'s are employee-funded, so it's your money! You take it with you when you leave. The good news is that, if you are vested, you get to keep the funds your employer invested as well. If you terminate your employment before you are vested, the unvested portion of the employers' contribution is returned to the employer. The term "vest" refers to your degree of ownership based on the number of years of service. So, for example, you may become 60% vested, or own 60% of the employer's contribution, after three years and become 100% vested after five years of employment.

When you ultimately retire, you will be faced with making a choice on how to access your 401(k) funds. You will generally be offered the following options:

• Receive a lump-sum distribution. If you choose this option, you'll want to be very careful to reinvest your retirement funds cautiously. Remember, if you don't roll these funds into another tax-deferred investment, such as an IRA, your money will be fully taxable as soon as you receive it.
• Withdraw your funds in installments over a 5-, 10- or 15-year period. Upon your receipt, each installment is taxed at your current tax rate.
  
• There are many things you'll want to evaluate before choosing your distribution options. In addition to assessing your other retirement income sources, you may also want to consider your age, health, marital situation, tax situation, and projected living expenses. You may have a benefits administrator who can run several "what-if" scenarios to help you decide on the best situation for you.

To learn more about your employer-sponsored 401(k) retirement plan, ask your benefits administrator to give you more information.