Defined Contribution Plan
“Because only the contribution, not the benefit, is
known ahead of time, the onus is on you, the employee, to
make sure that you will have enough money to live on during
retirement.”
- Nancy Lloyd, author of
Simple Money Solutions
Nowadays, retirement savings is your responsibility--not
your employer’s and not the government’s.
In 1978, the 401(k) plan was introduced in the U.S. and has
since become the employer-sponsored retirement plan of choice.
The reason for its popularity has a lot to do with the increased
trend for employees to change jobs more often. In fact, the
odds are that today’s employee is unlikely to stay with
the same company for more than 5 years.
The defined contribution plan allows an employee to change
jobs and still have the ability to maintain a retirement savings
account. For employers, the defined contribution plan has
become more attractive as a result of:
- Recent changes in pension and tax laws.
- Less regulation and paperwork required with these plans.
- Lower costs to fund and administer these plans.
The most popular defined contribution plans are the 401(k)
and the 403(b).
401(k)
The 401(k) is a retirement plan, offered by private companies,
where the actual contribution to the plan is defined--but
the end-result benefit upon retirement is not.
403(b)
These plans are very similar to 401(k) plans--but offered
by state and federal government agencies to their employees.
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