What is 401k Plan and How Does It Work? Must Read!
American companies have long recognized the importance of offering a 401(k) plan to their employees.
For one, it’s an important tool to attract and retain talent. Employees not only look for a competitive salary, but they also look for good health care coverage and a retirement plan when deciding to accept or reject a job offer. In fact, 77% of workers participate in a retirement plan when given the choice, according to the Bureau of Labor Statistics.
Two, employees need support in saving for retirement. Today’s economic environment has made it very difficult for many employees to make ends meet, and money has become the top source of stress for workers. Many are not saving enough to fund their retirement. A 401(k) plan, especially one where employers offer a matching program, helps ease the burden.
But simply offering a 401(k) plan isn’t enough.
HR professionals and CEOs must understand that a majority of employees grapple with understanding how these plans work and how to optimize their benefits, leading to misconceptions, an underappreciation and underutilization of the benefit, and a real risk of outliving one’s nest egg.
Addressing these issues through financial education is not just a “nice value-add service” to your employees, it’s essential.
Don’t believe me?
“So, what is 401k plan and how does it work?” is one of the top inquiries your employees make on search engines.
Common Misconceptions Among Employees
Employees hold many misconceptions about 401(k) plans. Here are just a few:
- Many are mistaking a defined benefit plan with a defined contribution plan, and often believe their 401(k) will provide a guaranteed retirement income when in reality, their account balance and income will depend on market performance.
- Nearly 6 in 10 workers wrongly believed they were contributing to a 401(k) retirement plan when in fact they were not – according to a survey conducted by the Principal Financial Group
- Many believe their 401(k) contributions are automatically invested and mistake the plan, which is a tax shelter, as an investment product.
- When investing, many employees choose a Target-Dated-Fund (TDF) as the default option, however this one size fits all approach comes with risks that can exasperate the retirement savings gap.
- Many employees mistakenly believe they are “maxing out” their 401(k) by contributing enough to receive their employer match, except that true maxing out means reaching the IRS annual contribution limit. (For 2025: $23,500, $30,000 if age 50+)
- There’s a prevalent belief that 401(k) plans have no fees, leading to not only a lack of scrutiny over investment choices, but also a lack of understanding on impact fees have on the power of compounding.
The Importance of Education
Providing a 401(k) plan to employees without adequate education is like buying a car for a teenager who’s never taken driving lessons.
There’s a good chance when it comes to making wise choices around their financial security, they’ll crash and burn. Fumbling around leads to mistakes and or worse, inaction. The consequences are higher stress and lower productivity among employees and higher employee turnover and expenses for the company.
Financial education can prevent litigation.
More and more companies are also facing lawsuits due to perceived negligence in managing 401(k) plans. For instance, between 2021 and 2023, some 200 lawsuits were filed against 401(k) plan fiduciaries on allegations of excessive fees and mismanagement. If 401(k) plans do not provide effective participant-driven education programs, and it is shown that they failed to equip participants to make informed investment decisions, this non-compliance with federal rules can expose plan sponsors to potential lawsuits.
Implementing Effective Education Programs
Our firm, Saij Wealth Consulting/Saij Elle have run hundreds of impactful financial literacy programs that ensure employees have the knowledge and skills to make confident financial choices.
Implementing the right programs can ensure any investment a company in it returns greater employee satisfaction, reduces financial stress and prepares workers for longevity risks that surround retirement.
- Make Learning Accessible and Engaging
Work-life balance struggles and remote work environments make it harder to get employees to engage in financial education. Offering online programs that they can tap into, providing incentives, and strong communication strategies can help increase participation.
- Deliver Targeted, Life-Stage Education
A one-size-fits-all approach to financial literacy doesn’t work. Instead, segment 401(k) education that speaks directly to employees at different life stages and priorities — early-career professionals vs. those nearing retirement—will drive the best outcomes.
Women, in particular, need tailored messaging and financial strategies given that the approximate median contribution for women is 43% less than for men and women’s median 401(k) balances are roughly one-third of those of male counterparts (Source: T. Rowe Price)
- Provide Education That Reduces Financial Anxiety
Market volatility and economic uncertainty make financial decision-making stressful—especially for women, who often feel less confident about long-term investing. Without the right education and guidance, many women under-save, miss out on employer benefits, and struggle to build wealth. A strong 401(k) education strategy helps employees understand how to manage their finances and mitigate risk regardless of market conditions.
- Strengthen Onboarding & Offboarding with Clear, Actionable Education
Employees are most engaged with 401(k) financial education when they join or exit a company. A well-structured onboarding and offboarding experience ensures they understand how the plan works, how to build a diversified, goal-based investment portfolio, and their portability options—helping them make informed decisions from day one and as they transition out.
- Have Feedback Mechanisms
Create channels for employees to ask questions about what is 401k plan and how does it work? the different investment options, and provide feedback on the education programs, to allow for continuous improvement.
How Saij Elle Can Help
We make financial education accessible, engaging, and tailored to employees’ unique needs—whether they are starting their careers, preparing for retirement, or navigating career transitions. Our holistic online financial programs provide interactive learning, targeted financial strategies for women, and clear, actionable guidance to help them maximize their benefits, reduce financial stress, and close the retirement savings gap.