Defined Contribution Plans Overview -
Defined Contribution Plans Overview
Updated: 15/Jun/06 09:06:18 by Joe Friberg
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Defined Contribution Plans Overview

A plan that has individual accounts for each participant, and their benefits are determined by the account balance.

A Defined Contribution plan sets up an individual account for each participant. Contributions are calculated based on a participant's pay (and possibly other factors such as age or service) and added to this account. The account can increase or decrease based on the performance of the assets held by the account. In the end, the benefit from the plan at retirement or when the participant leaves the company is based solely on the asset balance in the account.

Since the plan participant can either benefit or suffer from the performance of the assets in his/her account, it is said that the employee bears the risk of asset performance. This is the opposite of the situation in a Defined Benefit Plan, where the participant's benefit is calculated and guaranteed according to a prescribed formula, and the employer bears the risk of contributing more if the assets perform poorly (or contributing less if assets perform well).

The 415 limits set the maximum amount that can be contributed to a participant's account in a year, and Section 404 limits the amount the sponsor can deduct for the year.