Which retirement plan is considered a defined contribution plan

Under this approach, individual participants are not permitted to direct the investment of any plan assets allocated to their accounts. The plan administrator has full ERISA fiduciary responsibility and potential liability for the investment of the plan's assets. These options can be combined. Participants may be permitted to direct the investment of a portion of their plan accounts for example, the portion that they contributed , and the plan administrator retains investment authority and responsibility for the remainder of the plan assets.

With respect to investment of a plan's assets, the plan administrator will never fully escape all potential liability for breach of its ERISA fiduciary duties. If investment authority is given to plan participants, the plan administrator remains responsible for selecting the investment options made available to plan participants and for monitoring those options to ensure that they remain appropriate options.

In addition, the plan administrator will be required to specify a default investment option into which a participant's account will be invested if the participant does not provide any investment directions; the selection of the default investment option is also a fiduciary act under ERISA. Because the investment of plan assets by anyone other than a plan participant is a fiduciary act subject to ERISA, the plan administrator will be exposed to ERISA fiduciary liability if the plan administration retains direct responsibility for investing plan assets and does not exercise that responsibility in compliance with ERISA fiduciary duties.

Administering participants' investment elections for their plan accounts and complying with those requirements will generally always require the assistance of an outside service provider. Few employers that sponsor defined contribution plans do not allow participants to direct the investment of their plan accounts; an employer that decides not to allow participants to direct the investment of their plan accounts should expect to face resistance from employees.

However, employers should still carefully evaluate the ability of their workforces as a whole to appropriately invest their plan accounts to support their retirement income goals and needs before deciding if giving this responsibility to their participants is in the participants' best interests.

A plan may permit participants to take loans against their account balances and may allow for limited withdrawals while an employee is still actively employed. There is no legal limit on the number of loans a participant may have outstanding at any time, as long as the total outstanding loan balances satisfy the stated limits; however, the plan can administratively limit the number of outstanding loans available to a participant.

Loans cannot have a term of more than five years unless the loan is to purchase the participant's principal residence, in which case the term is not limited. Loans must bear a commercially reasonable rate of interest. The plan may specify limits as to the frequency and number of in-service withdrawals.

Hardship withdrawals. Restrictions apply to the amount that may be withdrawn. Starting Jan. Birth or adoption withdrawals. See IRS Notice Automatic rollover or portability. Design considerations.

If the employer's intent is to encourage employees to save for retirement, allowing loans and in-service withdrawals works against that goal by allowing employees to deplete their retirement savings before retirement. However, participants may be more willing to participate in the plan and make their own contributions to the plan if they know they can access their plan accounts when needed, within the constraints imposed by law.

An employer should assess the needs of its workforce when deciding whether its plan should allow loans or in-service withdrawals, and if they are permitted, what limits will be imposed. Employers are not obligated to offer any of these options. Other forms of plan distributions are also available. Federal laws. The design and operation of tax-qualified retirement plans, including defined contribution plans, are strictly and extensively regulated by two federal laws: the Internal Revenue Code primarily Part I of Subchapter D of Chapter 1 and ERISA.

In addition, a multitude of related regulations and government agency pronouncements may apply. Department of the Treasury, as implemented by the IRS. The EBSA focuses more on a plan's relationship with its participants, including required disclosures to participants and participants' claims for plan benefits, as well as on the management of a plan and its assets by the plan's fiduciaries.

The IRS focuses primarily on the plan's compliance with the applicable nondiscrimination requirements and on ensuring that the plan document both includes all mandated statutory and regulatory provisions and is administered in compliance with those provisions.

In general, complying with the legal requirements enforced by the IRS is necessary to secure and preserve the tax-favored treatment of benefits provided under a qualified defined contribution plan.

In contrast, complying with the legal requirements enforced by the EBSA is necessary to avoid the imposition of penalties on the plan administrator and the individuals with the authority and responsibility for operating the plan. State mandates. At least 10 states currently have requirements for certain private employers to offer a retirement plan to employees. For example, California employers that do not already have a workplace retirement plan must participate in the CalSavers program to provide employees access to a retirement savings option.

Similarly, Illinois employers with 25 or more employees must participate in the Secure Choice program. COVID relief. Several pieces of legislation were passed in response to the COVID pandemic that impact defined benefit plans; some offering employers and participants temporary relief due to the impact of the virus.

ERISA mandates certain communications with defined contribution plan participants, including summary plan descriptions and annual reports on the plan's financial activity. Additional disclosures to plan participants are required under the Internal Revenue Code under certain circumstances, such as when the plan satisfies a safe harbor to avoid nondiscrimination testing of employer contributions or if the plan automatically enrolls newly eligible participants to make employee contributions to the plan.

Communicating with plan participants about the terms of the plan is an activity subject to the fiduciary responsibility requirements under ERISA. HR professionals charged with drafting communications to plan participants or with dealing directly with plan participants on plan issues need to make sure those communications are accurate, complete, objective and carefully drafted or phrased to be understandable by average plan participants.

You may be trying to access this site from a secured browser on the server. Please enable scripts and reload this page. Reuse Permissions. Page Content. Overview Retirement benefits can be a valuable tool for recruiting and retaining employees, but those benefits must be balanced with the cost to the employer of providing the benefits. Business Case With the uncertainty surrounding the future of Social Security as a source of retirement income, employer-sponsored retirement benefits remain a significant part of both employees' total compensation and their considerations when deciding whether to accept a job.

Types of Defined Contribution Plans Defined contribution plans are retirement benefits plans under which the benefit payable to a participant at retirement is determined by the amount of contributions made to the plan on that participant's behalf, plus investment earnings on those contributions over time.

Employer Contributions The employer can choose whether to make no contribution, nonelective contributions or matching contributions. Design considerations Employers should take into account a variety of factors in designing their plans.

Employee Contributions Four types of employee contributions exist: pretax, after tax, Roth individual retirement arrangement IRA and rollovers. Design considerations Administering a k plan that allows employee contributions of any type requires monitoring limits on those contributions and testing the plan to make sure that employee contributions are not disproportionately made by highly compensated employees.

Automatic Enrollment and Contributions An automatic contribution arrangement also known as automatic enrollment or auto enroll is a retirement plan feature that allows employers to enroll eligible employees in the plan automatically unless the employee affirmatively elects not to participate.

Vesting of Employer Contributions Employer contributions to a defined contribution plan become vested when the participant has a nonforfeitable right to some or all of the employer contributions if the participant terminates his or her employment. Investment of Participants' Accounts The assets held in a defined contribution plan must be appropriately invested. Design considerations With respect to investment of a plan's assets, the plan administrator will never fully escape all potential liability for breach of its ERISA fiduciary duties.

Loans and In-Service Withdrawals A plan may permit participants to take loans against their account balances and may allow for limited withdrawals while an employee is still actively employed. A plan sponsor may allow all, some or none of the following options. Design considerations If the employer's intent is to encourage employees to save for retirement, allowing loans and in-service withdrawals works against that goal by allowing employees to deplete their retirement savings before retirement.

Legal Issues Federal laws. Defined Contribution Plans. You have successfully saved this page as a bookmark. OK My Bookmarks. 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 decreases in the value of the plan's investments do not directly affect the benefit amounts promised to participants. Thus, the investment risks and rewards on plan assets are borne solely by the employer. When a participant becomes entitled to receive benefits under a cash balance plan, the benefits that are received are defined in terms of an account balance.

The benefits in most cash balance plans, as in most traditional defined benefit plans, are protected, within certain limitations, by federal insurance provided through the Pension Benefit Guaranty Corporation PBGC.

Consumer Information on Retirement Plans - Publications and other materials providing information about your rights as retirement plan participants under federal retirement law. Compliance Assistance - Provides publications and other materials designed to assist employers and employee benefit plan practitioners in understanding and complying with the requirements of ERISA as it applies to the administration ofemployee pension and health benefit plans.

This publication provides questions and answers on QDROs. Retirement and Health Care Coverage: Questions and Answers for Dislocated Workers PDF - Provides answers to commonly asked questions from dislocated workers about their retirement and health plan benefits.

PDF - Provides information on bankruptcy's effect on retirement plans and group health plans. FAQ Contact Us. Types of Retirement Plans. A k plan is primarily funded through employee contributions via pretax paycheck deductions. Contributed money can be placed into various investments, typically mutual funds , depending on the options made available through the plan.

Any investment growth in a k occurs tax-free, and there is no cap on the growth of an individual account. But unlike pensions, k s, place the investment and longevity risk on individual employees, requiring them to choose their own investments with no guaranteed minimum or maximum benefits.

Employees assume the risk of both not investing well and outliving their savings. Many employers offer matching contributions with their k plans, meaning they contribute additional money to an employee account up to a certain level whenever the employee makes their own contributions.

There is a limit to how much you can contribute to a k each year. Employees do not have control of investment decisions with a pension plan, and they do not assume the investment risk. Instead, contributions are made—either by the employer or the employee, often both—to an investment portfolio that is managed by an investment professional. The sponsor, in turn, promises to provide a certain monthly income to retired employees for life, based on the amount contributed and, often, on the number of years spent working for the company.

Almost all private pensions are insured by the Pension Benefit Guaranty Corporation , however, with employers paying regular premiums, so employee pensions are often protected.

Pension plans present individual employees with significantly less market risk than k plans. While they are rare in the private sector, pension plans are still somewhat common in the public sector—government jobs, in particular. A k is also referred to as a "defined-contribution plan," which requires you, the pensioner, to contribute your savings and make investment decisions for the money in the plan. You thus have control over how much you put into the plan but not how much you can get out of it when you retire, which would depend on the market value of those invested assets at the time.

On the other hand, a pension plan is commonly known as a "defined-benefit plan," whereby the pension plan sponsor, or your employer, oversees the investment management and guarantees a certain amount of income when you retire.

As a result of this enormous responsibility, many employers have opted to discontinue defined-benefit pension plans and replace them with k plans. Your employer is much more likely to offer a k than a pension in its benefits package. If you work for a company that still offers a pension plan, you have the advantage of a guarantee of a given amount of monthly income in retirement and investment and longevity risk placed on the plan provider.

If you work for a company that offers a k , you'll need to take on the responsibility of contributing and choosing investments on your own. Department of Labor. Internal Revenue Service. Pension Benefit Guaranty Corporation. Retirement Planning. Retirement Savings Accounts. Your Privacy Rights.