Tennessee Life Producer Practice Exam

What is a primary function of a 401(k) plan for its participants?

1. Tax-free withdrawals

2. Salary-deferral contributions

3. Guaranteed investment returns

4. Life insurance coverage

The correct answer is: Salary-deferral contributions

A primary function of a 401(k) plan for its participants is salary-deferral contributions. This allows employees to set aside a portion of their earnings before taxes are deducted, effectively reducing their taxable income for the year. By contributing pre-tax money to the 401(k), participants can accumulate savings for retirement and benefit from tax-deferred growth on their investments until they withdraw the funds, typically during retirement. This mechanism encourages saving for retirement and can enhance financial security for participants in their later years. In contrast, while tax-free withdrawals can occur under certain conditions, they are not a primary feature of a typical 401(k) structure. Guaranteed investment returns are not guaranteed in a 401(k) plan, as the investment performance can vary widely based on market conditions. Life insurance coverage is typically unrelated to the core functions of a 401(k) plan, which focuses primarily on retirement savings and investment.