Is a 401(k) an Employer-Sponsored Retirement Plan?

A 401(k) plan is a primary example of an employer-sponsored retirement plan, established and maintained by an employer for its employees. This sponsorship creates a structured way to save for retirement with tax advantages and involves administrative and fiduciary roles governed by federal law.

Defining Employer Sponsorship in a 401(k)

An employer’s role begins with the decision to establish a 401(k) plan, which involves creating a formal plan document that complies with the Internal Revenue Code and the Employee Retirement Income Security Act (ERISA). The employer is responsible for selecting a financial institution or third-party administrator to manage the plan’s assets and recordkeeping. This selection process is part of the employer’s fiduciary duty, meaning they must act in the best interests of the plan participants.

The employer also sets the specific rules of the plan within federal guidelines. This includes defining eligibility requirements, such as a minimum age and a required period of service. While plans can require up to one year of service with 1,000 hours worked, rules effective in 2025 also require employers to allow long-term, part-time employees who have worked at least 500 hours in two consecutive years to make their own contributions.

The employer also determines if and how it will contribute to employee accounts. A common method is an employer match, where the company contributes a certain amount based on how much an employee defers from their own salary.

Another sponsorship function is curating the menu of investment options. The employer selects a range of funds, typically mutual funds, from which employees can build their retirement portfolio. This selection must be managed prudently, offering a diversified set of choices to meet different risk tolerances and time horizons.

The employer is also responsible for ensuring employee contributions are remitted to the plan promptly. Contributions must be deposited as soon as they can be reasonably segregated from the employer’s general assets, which for many employers is within a few business days of the payroll date.

The employer must manage ongoing compliance, including annual nondiscrimination testing to ensure the plan does not unfairly favor highly compensated employees. They are also responsible for filing an annual report with the government, known as Form 5500, and providing employees with required disclosures like a Summary Plan Description.

Employee Participation and Control

While the employer establishes the framework, the employee exercises control over their individual account. Participation in a 401(k) is voluntary; an employee must enroll and decide what percentage of their pre-tax or Roth (post-tax) salary to contribute, up to the annual limit set by the IRS. For 2025, this limit is $23,500. Those age 50 and over can make an additional catch-up contribution of $7,500, and starting in 2025, a new provision allows a higher catch-up of $11,250 for participants aged 60 through 63, if their plan allows it.

Once enrolled, the employee directs how their contributions are invested by choosing a specific asset allocation from the menu of funds selected by the employer. This allows individuals to tailor their investment strategy to their personal financial goals and risk tolerance. The employee can typically change these investment selections as their circumstances or market conditions change.

The funds an employee contributes to their 401(k) are always 100% owned by that employee and are considered fully vested. Employer contributions, such as matching funds, are often subject to a vesting schedule. A common graded schedule might grant an employee ownership of 20% of employer funds after two years of service, increasing to 100% after six years. Once vested, employer contributions belong entirely to the employee, even if they leave the company.