National Evaluation Series (NES) Business Studies Practice Test

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What is one advantage of a 401k retirement plan compared with social security and employee pension plans?

Individuals can customize their investment funds
Lower contribution limits than pension plans
Guaranteed returns on investments
Access to funds before retirement age

The correct answer is: Individuals can customize their investment funds

One significant advantage of a 401k retirement plan compared with social security and employee pension plans is that individuals have the ability to customize their investment funds. This flexibility allows participants to choose from a variety of investment options, which may include stocks, bonds, mutual funds, and other securities. Such customization enables individuals to align their investments with their risk tolerance, time horizon, and retirement goals, thereby potentially optimizing their returns over time. In contrast, social security benefits are predetermined by government calculations and do not offer individual investment choices, while employee pension plans typically provide a fixed benefit based on salary and years of service with less influence from individual preferences. This tailored approach in 401k plans empowers individuals to take an active role in their retirement planning, potentially leading to better financial outcomes depending on their knowledge and investment strategies.