Investing 101: Employer-Sponsored Retirement Funds

A defined contribution plan, such as a 401(k), 403(b), or 457, is an employer-sponsored retirement option where employees contribute a pre-determined percentage of their wages or salary to help fund their retirement. Some employers will match a certain percentage of the contribution based on their benefit blueprint.

First offered in 1981, 401(k)s are the most common employer-sponsored defined contribution retirement plan in the United States. While 401(k)s make up 70 percent of all defined contribution plans, organizations such as non-profits, local governments, or churches might offer a 403(b) or a 457 plan to facilitate retirement savings for employees. And the stats show just how important these plans are to Americans in reaching their retirement goals:

• Americans held $11.2 trillion in defined contribution plans in the fourth quarter of 2021
• Defined contribution plans account for 28 percent of all retirement assets in the US. 

An affordable way to secure a strong financial future 

Widely offered and easy to access, defined contribution retirement plans can help almost anyone save and invest for retirement. In fact, almost half of US households with these plans, such as a 401(k), had incomes between $25,000 and $99,999. 

Fund fees have decreased substantially over the last twenty-five years, improving the wealth-building potential for Americans of all income levels. Federal law requires that plan sponsors “ensure that the services provided to their plan are necessary and that the cost of those services is reasonable,” allowing Americans from every income level the opportunity to invest in professionally managed funds

It’s no surprise that 91 percent of plan participants agree that employer-sponsored retirement accounts helped them think about the long term as automatic payroll deductions make it easier to save. 401(k) plans specifically are more likely to have employer contributions, with 91 percent of 401(k) participants receiving some level of financial match. 

Diverse investment options 

Nearly all 401(k) plans offer a lot of fund options, but you can work with plan providers to choose what investment strategy works the best for your financial goals. 

Regardless of your chosen investment strategy, the earlier you start investing in your 401(k) the more money you will have when you reach retirement age. Even if you start with a lower salary deduction, that money will continue to grow over time. You would be surprised at how much money you could be leaving on the table by delaying 401(k) contributions. 

The earlier and longer you invest in these plans will provide the largest return at retirement age. For example, data from 2018 shows that people in their sixties who participated in their plan for 2 years had an average account balance of $46,457, while someone who participated in their plan for more than 30 years had an average of $306,214.

It’s never too soon to think about your financial future!