Defined Contribution and Savings Plans

Defined Contribution and Savings Plans

How defined contribution and savings plans work

Advantages of defined contribution plans

Defined contribution plans for corporate employees - 401(k)

Defined contribution plans for school and nonprofit organization employees - 403(b)

Defined contribution plans for state and local government employees - 457

Defined contribution plans for federal government employees

How defined contribution and savings plans work

Defined contribution

Amount contributed or matched by the employer

Savings

Amount contributed by employee

Key points

• Employer is off the hook after making contribution
• Employee generally manages money

Advantages of defined contribution plans

Much easier for employer to manage

Benefits are generally much more portable than traditional pensions

Defined contribution plans for corporate employees - 401(k)

401(k) is the section of the tax law which describes these plans

See more detailed information on next page

Defined contribution plans for school and nonprofit organization employees - 403(b)

403(b) is the section of the tax law which describes these plans

Also called "Tax Deferred Annuitities" or TDAs

At one time investments were limited to annuities from insurance companies

Now 403(b) savers can invest in mutual funds which have lower management fees than annuities

Annuities also often have costly surrender charges

Worker can save up to lower of $9,500 or 20 percent of salary on tax-deferred basis

$9,500 figure indexed with inflation

Employees with 15 or more years of service can save a few thousand dollars more

Tax law changes in 1996 allow nonprofit organizations to set up 401(k) plans

401(k) plans are simpler to set up and monitor

More financial institutions provide 401(k) services

Defined contribution plans for state and local government employees - 457

457 is the section of the tax law which describes these plans

Can save up to $7,500 per year on tax-deferred basis

$7,500 figure indexed with inflation

Rules vary from plan to plan

Offers loan provision

Defined contribution plans for federal government employees

Called the Federal Thrift Savings Plan

Can save up to lower of $8,475 or 10 percent of salary

Goverment provides match up to five percent