Defined Contribution Plan
Defined Contribution (DC) plans provide income security for retirement years, as well as some access to money prior to retirement.
Here are some benefits of DC plans:
Individual Retirement Plan Helps employees save for retirement.
Tax Advantages Contributions can be deducted from pay on a before or after tax basis. If before tax, the amount shown as taxable income is lower. This saves the employee money paid in taxes each year.
Choice of Investment Employees can choose where to invest their money to maximize earnings.
Listed below are some key characteristics of DC plan:
Both the employee and the employer may put money into (or contribute to) an individual account for the employee.
Employees choose from a variety of investment funds in which to invest their money. The account can experience gains/loss over time.
Employees gain ownership (vesting) in the employer contribution over time. Employees are considered immediately vested in their own employee contributions.
Employees collect the benefit (the value of the account) at or after separation from employment, or sometimes sooner.
Employees decide the amount to contribute.
The maximum amount employees can contribute is subject to government limits, plan limits and choice of employee.
The maximum amount the employer contributes is defined by plan rules (and also subject to some government limits).
Because employees choose where to invest their money, they assume investment risk for their account balance.
Active employees may take loans (to be repaid) or withdrawals (not repaid) from their account while employed, depending on plan rules.
The benefit (the value of the account) is portable; meaning the vested portion of the benefit can be moved to another employers plan upon termination.
The employee benefit (the value of the account) is not fixed and often depends on:
How much the employee has contributed?
How much the employer has contributed?
How well the funds they chose to invest in have performed
How well the company has performed and
How much the employee has withdrawn versus saved over the years?