Rhode Island Life Insurance Practice Exam

What does a 401(k) plan generally provide its participants?

1. Guaranteed retirement income

2. Salary-deferral contributions

3. Life insurance coverage

4. Stock options

The correct answer is: Salary-deferral contributions

A 401(k) plan primarily serves as a retirement savings vehicle, allowing participants to make salary-deferral contributions. These contributions are deducted from an employee's paycheck before taxes, reducing their taxable income in the year they are made. This tax advantage helps in accumulating savings over time as the investments within the 401(k) grow tax-deferred until withdrawals are made, typically during retirement. The focus on salary-deferral contributions directly aligns with the core purpose of a 401(k) plan, which is to assist employees in saving for retirement through systematic contributions from their salaries. This feature is enhanced by the potential for employer matching contributions in many cases, further incentivizing participation and savings. The other options do not accurately reflect the primary offering of a 401(k) plan. For instance, while some plans may offer investment options that include stocks, and certain benefits may relate to life insurance or varying forms of compensation, these are not core functions of a 401(k) plan specifically.