An Employee Stock Ownership Plan (ESOP) is a form of defined contribution plan in which the investments are primarily in employer stock. A Money Purchase Pension Plan is a plan that requires fixed annual contributions from the employer to the employee’s individual account. Because a money purchase pension plan requires these regular contributions, the plan [...]
Posts under ‘Retirement Planning’
A 401(k) Plan is a defined contribution plan
A 401(k) Plan is a defined contribution plan that is a cash or deferred arrangement. Employees can elect to defer receiving a portion of their salary which is instead contributed on their behalf, before taxes, to the 401(k) plan. Sometimes the employer may match these contributions. There are special rules governing the operation of a [...]
About Profit Sharing Plan or Stock Bonus Plan
A Profit Sharing Plan or Stock Bonus Plan is a defined contribution plan under which the plan may provide, or the employer may determine, annually, how much will be contributed to the plan (out of profits or otherwise). The plan contains a formula for allocating to each participant a portion of each annual contribution. A [...]
What is a Simplified Employee Pension Plan (SEP)?
A Simplified Employee Pension Plan (SEP) is a relatively uncomplicated retirement savings vehicles. A SEP allows employees to make contributions on a tax-favored basis to individual retirement accounts (IRAs) owned by the employees. SEPs are subject to minimal reporting and disclosure requirements. Under a SEP, an employee must set up an IRA to accept the [...]
A defined contribution plan
A defined contribution plan does not promise a specific amount of benefits at retirement. In these plans, the employee or the employer (or both) contribute to the employee’s individual account under the plan, sometimes at a set rate, such as 5 percent of earnings annually. These contributions generally are invested on the employee’s behalf. The [...]
A defined benefit plan promises a specified monthly benefit at retirement
A defined benefit plan promises a specified monthly benefit at retirement. The plan may state this promised benefit as an exact dollar amount, such as $100 per month at retirement. Or, more commonly, it may calculate a benefit through a plan formula that considers such factors as salary and service — for example, 1 percent [...]
How do cash balance plans differ from 401(k) plans?
Cash balance plans are defined benefit plans. In contrast, 401(k) plans are a type of defined contribution plan. More about Defined Benefit Plans and Defined Contribution Plans. There are four major differences between typical cash balance plans and 401(k) plans. * Participation. Participation in typical cash balance plans generally does not depend on the workers [...]
How do cash balance plans differ from traditional pension plans?
While both traditional defined benefit plans and cash balance plans are required to offer payment of an employee’s benefit in the form of a series of payments for life, traditional defined benefit plans define an employee’s benefit as a series of monthly payments for life to begin at retirement, but cash balance plans define the [...]
How do cash balance plans work?
In a typical cash balance plan, a participant’s account is credited each year with a pay credit (such as 5 percent of compensation from his or her employer) and an interest credit (either a fixed rate or a variable rate that is linked to an index such as the one-year Treasury bill rate). Increases and [...]
How to prepare for retirement?
The three major elements of your retirement portfolio are benefits from pensions, savings and investments, and Social Security benefits. Each year the Social Security Administration sends you your personal Social Security Statement, which gives you an estimate of the monthly benefit amounts you and your family may qualify for now and in the future. Once [...]