Defined contribution plans are commonly funded by a combination of employer and employee contributions. The most common defined contribution plan is the 401(k) offered by private-sector employers. Other types include the 403(b) plan, which is offered by charitable or educational organizations, and the 457 plan for employees of state and municipal governments. The plan types are named after sections of the federal tax code.
With a defined contribution plan, your taxable income is reduced by the sum of your contributions (within legal limits) and your investment gains are tax-deferred. The money comes out of your paycheck and employers often match a percentage of your contribution. If you cannot afford to contribute the maximum amount, make sure you invest at least enough to trigger your employer's match so you can take full advantage of this incentive to save.
Defined contribution plans usually offer a variety of investment options, and it is up to you to select among these options. The total amount of your retirement savings will depend on the market performance of the investments you've selected. Neither your employer nor your plan administrator is responsible for the investment outcome of your defined contribution plan.
Defined contribution plans allow earnings to accumulate tax-deferred and are portable, meaning you can take your accumulated funds with you if you change jobs and roll them into your next employer's plan. Or you can roll them into another type of retirement savings tool, such as an IRA.
Publications and Resources
401(k) Fee Disclosure Form. ACLI, working with the American Bankers Association and the Investment Company Institute, developed a 401(k) Fee Disclosure Form designed to assist companies in making informed cost-benefit decisions when selecting 401(k) service providers.