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Defined Contribution Plans

Under a Defined Contribution Plan, the amount of an employer's contribution is "definitely determinable." In other words, the employer's contribution is known in advance. A retired employee's distribution from the plan is not determined in advance, but rather is determined by the amount that accumulates in the account from employer contributions, employee contributions, investment earnings and forfeitures.

Types of Defined Contribution Plans handled by McCready and Keene include:

A 401(k) Plan is either a profit sharing or a stock bonus plan that gives employees an opportunity to save toward retirement on a before-tax basis. To encourage employees to utilize the 401(k) plan, many employers provide a "matching" contribution. Distributions from a 401(k) can be made only at prescribed times, including, but not limited to when the employee retires, dies or reaches the age of 59½.
403(b) Plans are tax-sheltered retirement arrangements maintained by public education organizations and certain tax-exempt entities. Contributions are often made through salary reduction, but employer contributions can also be made. Unlike 401(k) plans, 403(b) plans cannot invest in individual stocks. Instead, their choices are annuity and variable annuity contracts with insurance companies, custodial accounts made up of mutual funds or retirement income accounts for churches. As with a 401(k), distributions can be made only at prescribed times, and are generally limited to when the employee retires, dies or reaches the age of 59½.
457 Plans are non-qualified deferred compensation plans available only to employees of state and local governments and other non-governmental tax-exempt organizations. They are not subject to the requirements of a qualified plan, but they must meet their own requirements under the Internal Revenue code. Distributions are made upon retirement, termination of employment, extreme financial hardship or at death to the named beneficiaries. Distributions are taxable as ordinary income.
Employee Stock Ownership Plans (ESOPs) are a special type of qualified plan in which the contributions are invested primarily in voting stock issued by the sponsoring employer. When a corporation sponsors an ESOP, its employees become beneficial owners of the company where they work. Benefits are distributed to participants in the form of employer stock, cash or a combination of both.
A Profit Sharing Plan is a Defined Contribution plan to which the plan sponsor makes substantial and recurring, though generally discretionary, contributions. Employee contributions are usually optional. Amounts contributed to the plan are invested and accumulate (tax-free) for eventual distribution to participants or their beneficiaries either at retirement, after a fixed number of years, or upon the occurrence of some specified event. Unlike contributions to a pension plan, contributions to a profit sharing plan are usually tied to the existence of profits.
A Money Purchase Plan is a Defined Contribution plan in which the company's contributions are mandatory and are usually based solely on each participant's compensation. Unlike most profit sharing plans in which there are generally no unfavorable consequences for the company if it fails to make a contribution, with a Money Purchase Plan, failure to make a contribution can result in the imposition of a penalty tax, even if the company has no profits. Retirement benefits are based on the amount in the participant's account at the time of retirement.
A Target Benefit Pension Plan is a cross between a Defined Benefit Plan and a Money Purchase Pension Plan. As with a Defined Benefit Plan, the annual contribution is determined by the amount needed to pay a projected retirement benefit (the target benefit) at the time of retirement. However, if the plan differs from the actuarial assumptions used, with a Target Benefit Pension Plan the employer does not have to increase or decrease the contribution. Instead, the benefit payable to the participant is increased or decreased.

Some Advantages of Defined Contribution Plans…

  • The plan sponsor can be in complete control of the contributions made to the plan.
  • Defined contribution plans are more easily understood by employees than a defined benefit plan and usually generate more interest.
  • Younger employees can accumulate very significant account balances by retirement age.
  • Contributions can be integrated with Social Security taxable wage bases so larger contributions (as a percentage of pay) can be made on behalf of more highly compensated employees.
  • Administrative costs tend to be less compared to Defined Benefit plans.

Some Disadvantages of Defined Contribution Plans…

  • A newly established Defined Contribution plan may not generate a meaningful retirement benefit for employees who are middle-aged or older when the plan is established.
  • It is difficult to coordinate benefits from a Defined Contribution plan with Social Security benefits as the ultimate benefit available from the Defined Contribution plan is somewhat difficult to predict.
  • Subsidies to encourage early retirement and post-retirement benefit increases are generally not available from Defined Contribution plans.
  • Investment risk is assumed by the employee. Attempts to minimize risk can also minimize investment reward.
  • Distributions from Defined Contribution plans usually take the form of lump sum payments. Poor management of a lump sum distribution can leave a retired employee without "regular" retirement income.

Let McCready and Keene handle your Defined Contribution Plan

McCready and Keene manages many different types of Defined Contributions Plans, with assets totaling billions of dollars. For maximum convenience and flexibility, we offer two options for handling maintenance of individual participant balances in these plans: the highly popular Daily Valuation Accounting Services and the traditional Balance Forward Accounting Services. To learn more about the services we offer associated with Defined Contribution Plans click on a link below: