401k Basics

• The 401k is a defined contribution plan in which you can contribute a percentage of your salary on a tax-deferred basis. Your employer also can match your contributions up to a certain amount, which means you can get free money for retirement. Once you put money in the account, you can invest it in the financial vehicles offered in the plan (which usually include stock market investment opportunities) and earn returns. The returns are not taxed at that time. When you retire, you pay taxes on the money you withdraw at your normal marginal tax rate.
  
  

ESOP

• The employee stock ownership plan (ESOP) can be offered by an employer as a way for employees to buy stock in their own company. With this type of plan, the company sets up a trust and makes tax-deductible contributions to it. The money in the trust is used to buy shares of stock in the parent company, and these shares are distributed to individual employee accounts within the trust. This helps the employee accumulate many shares in the company for which he works.
  
  

ESOP Considerations

• With the employee stock ownership plan, the company can borrow money with the trust. Once the company puts money into the trust, it can leverage that money and buy additional shares of stock. With other retirement plans, the use of leverage is not allowed. An ESOP provides incentive for the employee to work harder and perform better, because helping the company grow also helps grow the employee's wealth.
  
  

401k Considerations

• With a 401k plan, you, as the employee, can invest in many securities outside your company. Putting all your retirement funds into stock in your company is risky, because it does not create a diversified portfolio. Even if you have confidence in your company's long-term potential, things can change. A 401k plan allows you to get money from your employer, but you can put the money into investments you choose.