The New Commonsense Guide to Your 401(k): Rebuilding Your Portfolio From The Bottom up

Chapter 15. The Three Main Players

FINANCIAL MISTAKES often result from a lack of perspective. We see the landscape from ground level in the forest. To make sound financial decisions, you should understand who you're dealing with and what vested interests your partners have.

The three players involved in the 401(k) plan are your employer, who sponsors the plan; you and the other employees who participate in the plan (or don't participate); and the government, which regulates the plan, aiming to make certain that employees are treated fairly, that the company doesn't take off with the money, and that the Internal Revenue Service (IRS) eventually gets its money from the plan in the form of taxes.

Each of the three makes demands on the 401(k) plan, and each gets something out of it. Naturally, you're concerned with what you get out of the plan. That will depend a good deal on you and your understanding of the process. Over the years that I've been writing about personal finance, I've received hundreds of letters from readers who made big financial mistakes simply because they misunderstood these rules and mistakenly believed that the entire process is set up to benefit them.

The first 401(k) plan, set up in 1981, was designed almost entirely as a solution for employers who couldn't attract lower-paid workers to a retirement plan. That's because if lower-paid workers don't contribute, the government nixes the plan as a benefit for the higher paid. The carrot to entice lower-paid workers ...