The economic recession has taken a toll on many aspects of business, including defined contribution plans. These plans, including 401(k) and 403(b) plans, took a hit over the last several years. Many employees have scaled back the amount that they have contributed to these plans and some employers suspended their matching programs in order to decrease expenses.
As the economy is bouncing back, so are defined contribution plans. It’s important that you properly manage these plans to make sure you get the most of them and are properly saving for your retirement.
“Employees need to understand that they are responsible for their retirement with a defined contribution plan, because they’re contributing their own money,” says Mike Kozlowski, CPA, director, assurance and business advisory services at GBQ Partners.
Smart Business spoke with Kozlowski about how to properly manage defined contribution plans.
What are some important attributes of defined contribution plans?
Defined contribution plans are becoming the norm, as defined benefit plans are going away. The difference between the two is that a defined benefit plan will actuarially determine what the employee’s benefit will be when they retire. Additionally, the employee may not necessarily have to contribute their own money to the plan.
With a defined contribution plan, the employee has their own account where they’re contributing their own money. The employer may be matching those contributions but is generally not obligated to do so. Whatever your individual account grows to would be your benefit at retirement or when you terminate employment with the company.
What are some key items you should understand about defined contribution plans?
Under defined contribution plans, employees take more responsibility for putting money into the pension plan, and generally are in charge of their own accounts. The employee makes the investment decisions based on the available investments options that the employer has chosen for the plan.
These plans will typically have a third-party administrator who can assist the employee in selecting which funds are best for them depending on their tolerance for risk. Most plans have between 10 and 30 investment options to pick from with varying degrees of risk. This allows an employee to properly diversify their investments and will take some of the risk away from the employer.