It’s a common saying that living for retirement starts in the early 20s or 30s. What this means is that smart people start saving up money for their retirement in the form of a 401K retirement plan as early as possible.

Depending on how soon you start saving and investing, you could have a significant amount of money saved for your later years.

For example, someone starting at the age of 25, contributing 10% for 35 years could have a total of $1,028,710 saved up by the time they were 60. One of the best 401K retirement calculators can be found at http://www.bloomberg.com/invest/calculators/401k.html.

Everyone needs a constant source of income, and for most people this is their job. However, most people don’t work forever – they retire at the age of sixty or sixty-five, which leaves a couple of decades without any significant source of income other than maybe social security benefits. So how are people to support themselves in retirement? One of the best ways is to create a 401K retirement plan early on.

A 401K retirement plan is a percentage of pay usually taken out of an employee’s normal paycheck and placed into their 401K account. Income taxes can be deferred for this purpose and good employers will match these saved funds. There are several other ways to get funding, such as stocks, bonds, mutual funds or other investments.

However, most people don’t want to spend the time to understand how to invest, or don’t want to pay someone to invest money for them. So they simply choose to have a portion deducted from their paycheck and placed into a 401K account.

As an employee benefit, a 401K retirement plan has to be sponsored by an employer, typically a private sector corporation. It’s possible to set up a 401K if you’re self-employed as well, and government entities could until 1986. It’s the responsibility of the employer to create and execute the 401K by shifting funds into the employee’s accounts. ERISA, or the Employee Retirement Income Security Act passed in 1974, sets the plan to default report to the plan sponsor.

However, in the case of the fiduciary there isn’t any default, so the plan creator has to name one. Usually this is the company’s committee of internal employees. If one can’t be found at the time there must be a procedure written into the 401K plan for appointing a fiduciary.

The ERISA does offer discretion because of its defaulting policy for all the different plans and investments, but most plan sponsors end up overriding this by submitting the control to the named fiduciary so they can select and implement financial investment plans.

Most 401K contributions are issued on a pre-tax basis. As of the 2006 fiscal year, employees can either contribute on a pre-tax basis or decide to use the Roth 401K provisions. This way they can offer up the required portion of their paycheck after taxes have been taken out, and get similar effects to the Roth IRA.

It’s required that the plan sponsor makes an amendment to the plan to allow for these options to be available to the employee. No matter what though, if there is any form of income to the account other than deductibles, it cannot be taxed. Interest, dividends or capital gains from stocks, bonds or mutual funds cannot be taxed under the Roth provisions. This increases the compound interest over periods of decades.