Tuesday, August 2, 2011

Defined Contribution Retirement Plan

A corporate retirement plan where the employee contributes a defined amount based on earnings or other factors. It is a tax qualified retirement plan. Eventual investment and retirement value of the account may be transferred or rolled over into another corporate plan.

These are different from defined benefit set ups where the amount put in by and for the employee is packaged with years of service, salary and other factors to calculate a monthly benefit. Contribution retirement accounts are taken out, transferred or people can do a rollover.

The years of service and amount of contributions will effect the account balance and asset allocations are a factor in the performance of the investments and rate of return. This is also true in defined benefit corporate retirement plans.

Contribution plans like 401k's and group IRA accounts are much more popular than benefit arrangements nowadays. With much of the workforce employed with small business or non union type companies, the need for providing a fixed monthly benefit at retirement and calculating that benefit over time is less appealing to a company when a 401k or other employee controlled plan is easier for the company.

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