Defined Contribution Plans
A defined contribution plan defines the contribution the company will make to the plan and how the contribution will be allocated among the eligible employees. Separate account balances are maintained for each employee. The employee’s account grows through employer contributions, investment earnings and, in some cases, forfeitures (amounts from the non-vested accounts of terminated participants). Some plans also permit employees to make contributions on a before-and/or after-tax basis.
Because the contributions, investment results and forfeiture allocations vary year by year, the future retirement benefit cannot be confidently predicted. The employee’s retirement, death or disability benefit is based upon the amount in his account at the time the distribution is payable.
Employer account balances may be subject to a vesting schedule. Depending on the vesting and forfeiture section of the adoption agreement, non-vested account balances forfeited by a terminated employee who takes a distribution can be used to pay administration costs, reduce employer contributions or be reallocated to active participants.
Please keep in mind that you should always consult your pension consultant and complete plan document for your plan specifics.
The most common types of defined contribution plans are profit sharing, 401(k) and 403(b) plans.