Starting your career and landing a job that comes with a retirement plan is a major financial milestone—congrats! Now that you have the standard 401(k), you might be wondering what it is and how it actually works. Below we’ll demystify the investing process and share some tips and tricks to help you get the most out of your 401(k).
But if you’re one of the 69 million workers who doesn’t have access to the standard 401(k) through your employer, don’t worry! We’ll cover other ways you can invest for retirement to ensure you still meet your financial goals.
What Is the Standard 401(k)?
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The standard 401(k) is a relatively recent invention created by Ted Benna in 1979. It was intended to be an additional retirement benefit that employers could offer to supplement pension plans. But the standard 401(k) eventually overtook pensions because it’s cheaper for companies and more portable for employees. Pensions have to stay invested with the original employer, whereas 401(k) plans can be transferred when workers switch jobs.
Technically, there isn’t a “standard” 401(k) because every company’s plan has slightly different rules. Your vesting schedule, employer match, and investment options probably won’t be the same as your friend who works at another company. However, all 401(k) plan providers have a legal responsibility to offer investment options that are in your best financial interest. So you can feel confident that investing in your 401(k) is a good money move.
Any contributions you make will be taken directly from your paycheck, making it easy to build a nest egg. Plus, contributions are pre-tax, so you won’t owe income taxes on the amount you send to your retirement plan immediately. Instead, you’ll pay taxes on your withdrawals in the future, which is beneficial if you think you’ll be in a lower tax bracket after you retire.
How the Standard 401(k) Works
If you’ve ever had a brokerage account, the standard 401(k) investing process is similar. Usually you can select from a variety of stocks, bonds, ETFs, or mutual funds. Some assets available in your retirement plan may have fees, so pay attention to the cost when choosing what to invest in.
Many people choose target date funds because they’re pretty hands-off. They automatically shift to lower-risk investments as you get closer to your retirement date, so you don’t have to worry about rebalancing your portfolio.
Don’t overthink this decision too much, because you should be able to make changes later if needed. You can usually adjust your asset allocation to tweak your investing strategy. However, there may be limits on how often you can alter your investment mix to prevent overtrading, so keep that in mind.
Although all investments carry some level of risk, you can generally expect your retirement plan to increase in value over time. Depending on market conditions, the standard 401(k) typically yields a return of 5% to 8% on average. You may see some temporary downturns during bear markets and recessions, but your assets should bounce back as long as you don’t panic sell.
The Benefits of the Standard 401(k)
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Aside from being a simple way to set money aside for retirement, the standard 401(k) comes with many other benefits. As mentioned above, contributions come directly from your paycheck automatically, which makes saving for retirement a breeze. The contributions are also pre-tax, so they can reduce your current tax burden.
In most cases, companies offer contribution matches with their standard 401(k) plans. This means that your employer will contribute up to a certain percentage of your income based on the amount you’re setting aside.
For example, many companies offer a partial match of up to 6%. So if you contribute 6% of your earnings, your employer will match 50% of that amount—an additional 3% of your salary. This is functionally free money that can boost the value of your portfolio significantly, especially over time.
The Power of the Employer Match
Say you’re 30 and just started saving 6% of your $70,000 gross income for retirement. For simplicity’s sake, let’s assume you earn a 7% real return and don’t increase your contributions or income. In 35 years, you’ll have about $580,000 (in today’s dollars) in your retirement account.
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But if you factor in the partial employer match that equals 3% of your salary, it’s estimated that your investments will grow to roughly $870,000—a $290,000 increase. This shows how important it is to contribute enough to your standard 401(k) to get the maximum match your company offers. It’s also a good idea to up your 401(k) contribution when you get raises to boost your savings rate and grow your nest egg even more.
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What Happens If You Leave Your Job?
If you leave your employer, you have options about what happens to your 401(k). Some companies may allow it to remain invested where it is. Alternatively, you might be able to roll the account over when you exit, transitioning the funds to your new 401(k) or an IRA.
You could also withdraw your funds from the account early, but doing so can trigger a financial penalty. Plus, you’ll have to pay income tax on the disbursement, and you’ll miss out on potential gains in the future.
How to Invest Without a Standard 401(k)
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If you don’t have access to the standard 401(k), you’re not alone. Roughly half of workers have to save for retirement without one. Luckily you can open an IRA to invest for your future, which stands for “individual retirement account.” There are two main types—Roth and traditional.
Roth IRAs allow you to invest for retirement with post-tax dollars. This means you can take tax-free withdrawals from your Roth after you turn 59 ½. However, a major downside of this type of IRA is that it has income limits.
Single-filers who earn more than $161,000 of adjusted gross income aren’t allowed to contribute to a Roth IRA. But fortunately high-earners can still utilize traditional IRAs. They don’t have any income limits and allow you to set aside pre-tax dollars for retirement, similar to the standard 401(k).
It’s important to note that both types of IRAs have relatively low contribution limits. In 2025, you can only contribute up to $7,000 in your IRA, which is much less than the max of $23,500 for 401(k) plans.
Options for Business Owners
If you’re self-employed or run a business on the side, you can open a SEP IRA or Solo 401(k) instead. These accounts allow you to invest up to $69,000 per year or 25% of your total income/profits, whichever is lower.
If you have the standard 401(k), how’s it working for you? Share your thoughts in the comments below.
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Tamila McDonald is a U.S. Army veteran with 20 years of service, including five years as a military financial advisor. After retiring from the Army, she spent eight years as an AFCPE-certified personal financial advisor for wounded warriors and their families. Now she writes about personal finance and benefits programs for numerous financial websites.