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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 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 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 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.
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.
Employee Stock Ownership Plans (ESOPs) are a special type of stock bonus 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.
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.
- 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.
- 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.
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:
Daily Valuation
Accounting Services
Traditional Balance
Forward Accounting Services
ESOPs
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