401-k-plan Definition

A retirement savings plan, established by an employer, that allows employees to send a percentage of their pre-tax compensation into a retirement account. Employers may match a percentage of the amount that the employee has withheld. If funds are withdrawn from a 401(k) before the owner is age 59⁄, the proceeds are taxed at the individual’s regular rate and a 10 percent penalty is assessed. Many 401(k) plans allow employees to borrow against the money in the plan. Mutual fund companies often are hired by corporations to manage the 401(k) plan.