What is the difference between a 401(k) and a Profit Sharing Plan?

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Technically, 401(k) plans are profit-sharing plans. However, 401(k) plans differ in several ways from the traditional profit-sharing plan. The biggest difference is that in a profit-sharing plan, only the employer makes contributions for eligible employees in the plan. Also, under a profit-sharing plan, the employer makes all of the investment decisions for the plan and the employees do not participate directly in those decisions. In a profit-sharing plan the employer's contributions, in some cases, are made whether or not the eligible employee contributes to the plan. In a 401(k) plan, eligible employees must choose to participate by making their own salary deferral contributions, which may or may not be matched by the employer at the employer's discretion.
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