What is a 401(k) plan?

A 401(k) plan is specifically designed as a retirement savings plan that is often sponsored by an employer. It allows employees to save a portion of their paycheck before taxes are taken out, which serves two main purposes: it reduces the employee's taxable income in the current year, and the funds saved in the account can grow tax-deferred until withdrawn, usually during retirement. This tax benefit can significantly enhance the individuals' retirement savings over time. Additionally, many employers may offer matching contributions, further incentivizing employees to participate in the plan.

Other options provided do not accurately describe a 401(k) plan. For instance, an emergency fund savings account is used to provide financial security in case of unexpected expenses, which is different from the objective of retirement planning that a 401(k) serves. Meanwhile, insurance policies generally offer protection against risks and are not intended for retirement savings in the same way a 401(k) is. Finally, a stock purchasing program may allow employees to buy shares of the company's stock, but this is distinct from the tax-advantaged nature and retirement goals associated with a 401(k) plan.