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
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
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
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
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: