Contrasting types of retirement plans




Advocates of Defined contribution plan point out that each employee has the ability to tailor the investment portfolio to his or her individual needs and financial situation, including the choice of how much to contribute, if anything at all. However, others state that these apparent advantages could also hinder some workers who might not possess the financial savvy to choose the correct investment vehicles or have the discipline to voluntarily contribute money to retirement accounts.

Comments

Post a Comment

Popular posts from this blog

Retirement plans in the United States

A retirement plan is a financial arrangement designed to replace employment income upon retirement. These plans may be set up by employers, insurance companies, trade unions, the government, or other institutions. Congress has expressed a desire to encourage responsible retirement planning by granting favorable tax treatment to a wide variety of plans. Federal tax aspects of retirement plans in the United States are based on provisions of the Internal Revenue Code and the plans are regulated by the Department of Labor under the provisions of the Employee Retirement Income Security Act (ERISA).
Read more

Types of retirement plans

Retirement plans are classified as either defined benefit plans or defined contribution plans, depending on how benefits are determined. In a defined benefit (or pension) plan, benefits are calculated using a fixed formula that typically factors in final pay and service with an employer, and payments are made from a trust fund specifically dedicated to the plan. Separate accounts for each participant do not exist. By contrast, in a defined contribution plan, each participant has an account, and the benefit for the participant is dependent upon both the amount of money contributed into the account and the performance of the investments purchased with the funds contributed to the account. Some types of retirement plans, such as cash balance plans, combine features of both defined benefit and defined contribution schemes. Defined contribution plans edit According to Internal Revenue Code Section 414, a defined contribution plan is an employer-sponsored plan with an individual account for
Read more

Portability and valuation

Defined contribution plans have actual balances of which workers can know the value with certainty by simply checking the record of the balance. There is no legal requirement that the employer allow the former worker take his money out to roll over into an IRA, though it is relatively uncommon in the U.S. not to allow this (and many companies such as Fidelity run numerous TV ads encouraging individuals to transfer their old plans into current ones). Because the lump sum actuarial present value of a former worker's vested accrued benefit is uncertain, the IRS, under section 417(e) of the Internal Revenue Code, specifies the interest and mortality figures that must be used. This has caused some employers as in the Berger versus Xerox case citation needed in the 7th Circuit (Richard A. Posner was the judge who wrote the opinion) with cash balance plans to have a higher liability for employers for a lump sum than was in the employee's "notional" or "hypothetical&quo
Read more