Defined contribution retirement plans have gained popularity, becoming “the retirement plan of choice for many businesses and individuals,” according to FinancialWeb
A Defined Contribution plan, commonly known as a DC plan, allows an employee to self-determine how much they want to contribute to their retirement rather than what kind of payout they can receive when they leave their work life, according to FinancialWeb.
A DC plans works like this: a percentage or dollar amount of an employee's salary gets invested each month. Typically, the money is invested in a mutual fund included in the employer's retirement investment plan.
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"The amount you have at retirement depends on how much your employer contributes to the plan, how much you as the employee save in the plan, how long you leave those funds invested, and how well your investments perform inside the plan," according to My Retirement Paycheck
"More and more employers are replacing defined benefit plans with defined contribution plans, primarily due to the expense and long-term obligations associated with running a defined benefit plan,” My Retirement Paycheck said. “If you have a defined benefit plan through your employer, be sure to regularly let your employer know that you really appreciate your retirement plan; it’s a benefit well worth keeping.”
FinancialWeb spotlighted four common benefits of a DC plan: portability, control, equal benefits and higher potential.
In terms of portability, as many employees change jobs frequently and move, it becomes easy for them to continue their retirement investing at their new work places. If an employee has money in a 401(k) from one job, they can turn around and put that into an IRA when they leave or roll those funds into a new employee's account, FinancialWeb said.
A DC plan also allows an employee maximum control because they get to decide how much they want to put into their retirement investment account. They also get to pick what type of investments they want, rather than have a pension manager make those choices for them.
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DC plans also make it easier to get benefits equally. Under a defined benefit plan, employees will have to wait for a time period — often 10 years or longer — before they are vested. DC plans also don't cap the amount you might be able to receive when you retire.
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