401(k) and Other Qualified Retirement Plans A qualified retirement plan is a plan in which the assets are held in trust for the benefit of employees and distributed to the employees at termination of employment, death, or retirement. There are various forms of qualified retirement plans, including defined benefit pension plans, profit sharing plans, money purchase pension plans, ESOPs and 401(k) plans.
In both the total number of plans and plan participants, the 401(k) plan is the most popular form of qualified retirement plan in the U.S. today. In fact, the 401(k) plan is also one of the most popular qualified plan approaches for providing employees with company stock.
With 401(k) plans, each employee is permitted to choose how his or her pre-tax salary deferrals will be invested. The corporate sponsor typically makes "matching contributions" as an inducement to encourage employees (especially those who are offers lower paid) to put some of their salary into the plan.
Many companies that sponsor retirement plans offer these matching contributions in the form of company stock rather than cash, which has the decided advantage of improving the company's cash flow. Employers may also permit employees to purchase company stock with the wages they have deferred into the plan. Unless the company is publicly traded, however, it would have to take steps to comply with securities registration rules before permitting such employee purchases.
Companies whose stock is public must provide employees with the opportunity to diversify their stock holdings within the plan. To meet the diversification requirements, participants must be provided with at least three diversified investment options other than employer stock. Diversification options must be provided at least quarterly and at least as frequently as other investment changes permitted under the plan.
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