Defined contribution Plans:
A plan in which the employer’s contribution to employees’ retirement savings funds is specified
Instituting policies that enable employees to easily take their accumulated pension funds when they leave employer:
In contrast defined contribution plans specify what contribution the employee and /or employer will make to the employee’s retirement or saving funds. Here, in other words the contribution is defined not the pension. With a defined benefits plan the employee knows his or her retirement benefits will be upon retirement. With a defined contributions plans; the person’s pension will depend on the amounts contributed to the fund and on the retirement fund’s investment earnings. Defined contribution plan prevail among employers today, because of their relative case of administrative favorable tax treatment and other factors. Portability – making it easier for employees who leave the firm prior to retirement to take accumulated pension funds with them — is enhanced by switching from defined benefit to defined contribution plans. The former are therefore more appropriate for employees who plan to stay with the firm until retirement.
401 (k) Plans
The most popular defined contribution plans are based on section 401(k) of the Internal Revenue ode, and called 401 (k) plans. The employee authorizes the employer to deduct a sum of money from his or her paycheck before taxes and to invest it in the bundle of investments in his or her 401 (k). The deduction is pretax, so the employees pays no tax on those set as aside dollars until he or she retires (or removes the money from the 401 (k) plan). The person an decide to deduct any amount up to the legal maximum (the IRS sets an annual dollar limit – now about $15,000 ),employees arranges usually with an investment company such as Fidelity investments, to actually manage the 401(k) plan and to make various investments options available to the company’s 401(k) plan. The options typically include mutual stock funds and bond funds.
Employers should choose their 401 (k) providers with care, because f the employer’s responsibility to its employees, and because changing 401(k) providers can be grueling venture. In addition to trustworthiness employers want a 401 (k) plan provider that makes it easy for employer and employee to participate in plan. Firms such as Vanguard, Fidelity and others can establish online, fully Web based 401 (k) plans even for small firms with 10 to 50 employees. Employees get various online tools – such as an asset allocation planner.
Other defined contribution plans:
401(k): a defined contribution plan based on section 401(k) of the internal revenue Code.
Savings and thrift plan: Plan in which employees contribute a portion of their earnings to a fund; the employer usually matches this contribution in whole or in part.
The 401(k) plan is one example of a savings and thrift plan. In any savings and thrift plan, employees contribute a portion of their earnings to a fund, and the employer usually matches this contribution in whole or in part. The employer’s contributions can be considerable particularly where competition for employees is intense. Harleysville Group Inc, matches up to 100% of an employee’s contribution up to 6% of his or her salary in an effort to attract and retain information technology workers. Radio Shack matches 401(k) contributions at 159%.
Deferred profit sharing plan
A plan in which a certain amount of profits is credited toe ach employee’s account, payable at retirement termination or death.
A qualified tax deductible stock bonus plan in which employers contribute stock to a trust for eventual use by employers.
In a deferred profit sharing plan, employers contribute a portion of their profits in cash to the pension fund, regardless of the level of employees’ contribution (income taxes on these contributions are deferred until the employee retires or leaves the employer). An employee stock ownership plan (ESOP) is a qualified tax deductible defined contribution plan in which employers contribute stock to a trust for eventual use by employees who retire.
Overall about 91% of the employers offer 401(k) type plans; 67% also offer defined benefits plans alongside their 401(k) type plans; 67% also offer defined benefit pension plans alongside their 401(k) and 18% offer other deferred profit sharing saving plans.