Tags: Retirement | defined contribution | retirement plans | drawbacks

Drawbacks of Defined Contribution Retirement Plans

By    |   Wednesday, 26 August 2015 04:25 PM

Defined contributions plans, commonly referred to as DC plans, are retirement investment programs that employees put money into.

Among them are 401(k)s, 403(b)s, 457s and Thrift Savings Plans, CNN Money noted.

Typically, an employee decides on how much they want to save and that money is taken out of wages as a payroll deduction from their salary.

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According to Investopedia: "There is no way to know how much the plan will ultimately give the employee upon retiring. The amount contributed is fixed, but the benefit is not."

With a DC plan, there are restrictions on how funds may be withdrawn by an employee and when. Those who do not pay attention may incur penalties.

Companies often offer matching programs for DC plans. But employees also have to wait until those matching funds become vested before they can have access to the full amount in their accounts, CNN noted.

However, it added, "the match is free money! And it effectively increases your income without increasing your tax bill, since you pay no taxes on matching contributions until you withdraw them in retirement."

The downside, CNN added, is it may be years before all that money is yours. "Leave your job before then, and you'll lose some of that delightful free money — even if you're laid off," CNN noted.

Many states struggling with pension obligations and shortfalls in those funds are now acting like private companies — turning from defined benefit plans (guaranteed pensions) to defined contribution plans, which require workers to save in plans like 401(k)s, Reuters noted.

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Defined contributions plans, commonly referred to as DC plans, are retirement investment programs that employees put money into.
defined contribution, retirement plans, drawbacks
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2015-25-26
Wednesday, 26 August 2015 04:25 PM
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