The vast majority of employers who offer retirement plans specifically offer 401(k) plans. Though increasingly popular, 401(k) plans are not terribly easy to understand, let alone navigate. In fact, a 2024 poll of 2,000 U.S. residents by Beyond Finance found that two-fifths of Americans don’t even know what a 401(k) plan is.
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How do you explain in simple, digestible terms what a 401(k) plan is? Well, you could turn to the mightiest generative AI chatbot available to anybody on the internet: ChatGPT, which can do everything from finding local deals to passing the bar exam.
GOBankingRates asked ChatGPT to explain 401(k) plans to us like we’re 12 years old. The explanation ChatGPT provided is a very simple explanation — at times overly so. It was also a little too lighthearted and didn’t even attempt to hit home the vital importance of retirement planning with a 401(k). Regardless, here’s what the AI had to say.
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A 401(k) Plan Is a Piggy Bank for Your Future
A lot of kids grow up with piggy banks, so they’ll get the metaphor ChatGPT gave — that a 401(k) plan is a piggy bank, but for your future.
“But instead of using it to buy toys or video games, you use it when you’re older and stop working (that’s called retirement),” it explained.
Here was a (missed) opportunity for ChatGPT to provide more context. For example, it could have said that this piggy bank should be thought of as a necessity because it’s money you need to literally survive, eventually. Dark as that may be, the fact is that many retirees slip into poverty because they didn’t invest in 401(k) plans. Twelve-year-olds are not 5-year-olds. They should know about this grim reality — and that they can avoid it.
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These Plans Are Only Accessible Though Employers Who Provide Them to Their Employees
ChatGPT said that once you grow up and get a job, you say, “Hey, I want to save some of my money for the future!”
ChatGPT could have been more pointed and more urgent. Yes, 12-year-old kids aren’t sophisticated thinkers, but that doesn’t mean they only understand things when put in lighthearted and fun language. ChatGPT could improve by saying “I need to save some of my money…” rather than “I want to save some of my money…” It could also briefly touch on the consequences of not saving for retirement.
The chatbot then explained that your job takes “a little bit of money from your paycheck (before taxes) and puts it into this special 401(k) account.” And that money you plant in a 401(k) plan grows “into a money tree.” So far, this is the most astute perception ChatGPT has generated.
This Is Free Money — But It Comes With a Major No-No
ChatGPT described a 401(k) plan as free money — not unlike how financial planners explain it, so that’s fair. That free money is when your employer contributes a match, which is common. In many cases, 401(k) matches are between 3% and 6% of your salary.
ChatGPT also highlighted the severe rule that comes with these plans: You can’t withdraw the money until you’re older (usually around 59½ years old). If you do, you’ll pay a penalty.
“So it’s long-term saving, not like your piggy bank for candy,” the chatbot said. This is a kind of cute way of saying that you have to be wise and future-minded with your 401(k) plan, but it’s also sort of incoherent. The explanation would be better without this cutesy wrist slap about candy. Again, these are 12-year-olds, not 5-year-olds.
401(k) Plans Build Up Money With Time
ChatGPT concluded its explanation of 401(k) plans by describing why they’re “awesome” and provided the following points:
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You save money automatically.
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Your boss might help.
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It grows over time, thanks to investing.
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You’ll thank yourself when you’re old and want to chill on a beach.
The first three bullet points are spot on. The last one is obnoxious malarkey. It suggests that 401(k) plans are basically stashes of fun money for old people, when they are, in fact, core pillars of financial security, no matter your wealth status or income level. And you should know this regardless of how young you are. In fact, the younger you know this stuff, the better.
Human Recap: How Does a 401(K) Work?
Here are a few key takeaways on 401(k)s, without AI assistance:
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A 401(k) is an employer-sponsored retirement plan that comes with tax benefits. In other words, you invest money into the 401(k) account where it can hopefully grow tax-free over time.
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Generally, you choose how much money you want to contribute to your 401(k) based on a percentage of your income. Your employer will then automatically withhold a portion of each paycheck and put it into the account, making it easy to regularly contribute.
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If your company has an employer-matched contribution, make sure to maximize your own contribution percentage so you aren’t leaving money on the table.
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Keep in mind that many employers now offer a Roth 401(k), also known as a designated Roth account. Contributions to Roth accounts are made with after-tax dollars, which means you don’t get a tax deduction, but your money can typically grow tax-free and be withdrawn in retirement.
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401(k) plans tend to offer different investment options, including mutual funds, exchange-traded funds (ETFs), target-date funds, index funds, money market funds and individual stocks and bonds.
Caitlyn Moorhead contributed to the reporting for this article.
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This article originally appeared on GOBankingRates.com: I Asked ChatGPT To Explain 401(k) Plans Like I’m 12 — Here’s What It Said
