Defined Contribution Plans Characteristics - Limits and Definition

Defined contribution plans have several characteristics involving the following factors:

• Some plans allow you to defer a portion of your compensation and contribute it to the retirement fund, thus reducing the amount of your salary available to you.

• The employer may match some percentage of this voluntary salary deferral and contribute it to the fund on your behalf.

• Participating in a defined contribution plan reduces your current year’s taxes. The government defers taxes on your contribution until you withdraw money at retirement.

• You usually have some say in determining how you invest your contributions from a menu of investment options.

• You expect the value of your contributions to increase over time, but this increase isn’t guaranteed. You take on investment risks but hope to participate in the rewards of growing investments over time.

Some defined contribution plans allow you, the employee, to set aside a percentage of your salary, or sometimes a portion of company profits, into a retirement account. ERISA regulations and the plan document dictate the percentage that you can set aside. In most defined contribution plans, the amount that the employer contributes is discretionary and can vary depending on corporate performance or profitability.