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Defined-Contribution Plan; Types

In: Business and Management

Submitted By xuyini
Words 614
Pages 3
Yini Xu
Wealth Management
3/2/2016

Defined-Contribution Plan; Types

A defined-contribution plan is a type of retirement plan for employee’s benefits during retirement. Every employee has an individual account. It depends on the contributions made by employers, employee or both and the investment performance of the account. The amount contained in the account is equal to the market value of the assets accumulated. It is not based on the employee’s working years or the earnings performance.

A defined-contribution plan is very different with the defined-benefit plan. A defined-benefit plan is a type of pension plan for employee’s benefits during retirement. It is controlled by employers who contribute a specified monthly benefit for employees. The amount is predetermined by a formula based on the employee's earnings history, the tenure of service and age. It does not depend directly on individual investment returns.

Unlike with a defined-benefit plan, employees have to control over how much to contribute and how much to invest. Compared with defined-benefit plans offer employees an annuity at retirement, defined-contribution plans are riskier. Employees need to take responsibility for their retirement income; they need to bear the investment risk.

There are four types of defined-contribution plans: 401(k) plans, 403(b) plans, 457 plans and Thrift Saving Plans. They are similar plans since they are ways to save for employee’s retirement that employer provides, but they have different target groups, “401(k) s are the version that corporations offer to their employees. (Roth 401(k) s are a subgroup that has different tax treatment.) 403(b) s are for employees of public education entities and most other nonprofit organizations. 457s are for state and municipal employees, as well as employees of qualified nonprofits. Thrift Savings Plans (TSPs) are for

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