![]() That means deferrals are deducted from current income, providing a tax benefit today. Salary deferral contributions are generally tax-advantaged, as is the case with the 401(k) defined contribution plans that have largely supplanted pensions. The employee will also have to make selections from a menu of investment alternatives and do any necessary balancing or other portfolio management on their own. The employer may also match employee contributions up to a limit. And the employer does not guarantee any fixed amount of retirement benefit.Įmployees usually have to opt into defined contribution plans and decide how much salary to defer. The financial resources available to pay for retirement depend entirely on the amount of money in the plan. ![]() ![]() If contributions are lacking or investment performance is poor, the amount of money in the plan will reflect that. The employee’s due diligence and skill determine how much money will be in the plan when the retirement date arrives. But it’s the employee’s responsibility to contribute money to the plan, sometimes with an additional contribution from the employer, and select the investments. In a defined contribution plan, the employer sponsors the plan. As a result, pensions have declined in popularity significantly over the last few decades in favor of defined contribution plans. This is because they are on the hook to pay the benefits no matter how their business or pension fund investments are doing. Pension plans are, however, also burdensome to employers. This makes a pension benefit highly reliable. The benefit is a set amount, sometimes indexed to inflation but otherwise unvarying. When the worker retires and stops drawing a paycheck, the company starts sending monthly benefits. It’s the employer’s responsibility to set aside money to fund the benefits and manage investing the assets. The employer uses a formula based on a worker’s years with the company, age and salary to determine how much the worker will get in retirement benefits. Defined benefit plans, also known as pensions, are entirely overseen by the employer. ![]()
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