How To Make the Most of Your Defined Contribution Plan

Empowering employees to secure their financial future is not only an act of goodwill, it is also crucial to fostering loyalty and commitment within a company. As the significance of retirement planning gains prominence, employers need to educate their workforce about participating in their 401(k) plan.  By providing comprehensive guidance and insights into this retirement savings vehicle, employers can equip their employees with the knowledge and tools they need to make informed decisions, setting them on a path towards a financially secure and prosperous tomorrow.

This article explains what a defined contribution plan is and how to make the most of it. Share this information with your employees so they can make more informed decisions when deciding whether to participate in your plan.

What is a Defined Contribution Plan?

A defined contribution plan is a qualified retirement plan to which both employers and employees may contribute.  Unlike a defined benefit plan, a defined contribution plan does not guarantee a specific benefit at retirement. The amount of an employee’s retirement benefit depends on how long the employee has participated in the plan, how much you, as the employer, and the employee have invested in the plan, and how the investments have performed over the years. Also, unlike certain defined benefit plans, the federal government does not guarantee the benefits of a defined contribution plan.  However, there are laws that protect the plan assets from misuse by the employer.

The following are the most common defined contribution plans:

  • 401(k) Plan. This is the most common type of defined contribution plan. It is funded primarily through employee contributions.  However, employers often match employee contributions up to a certain percentage.
  • 403(b) Tax-Sheltered Annuity Plan. Think of this as a 401(k) plan for employees of school systems and certain nonprofit organizations. Investments are made in tax-sheltered annuities or mutual funds.
  • SIMPLE IRA. The term “SIMPLE” stands for Savings Incentive Match Plan for Employees.  It is a less complex employer-based retirement plan, which often appeals to smaller employers.
  • Profit-Sharing Plan. The term “profit-sharing plan” refers to a plan funded primarily by employer contributions, although profit-sharing plans can have a 401(k) component.  In a profit-sharing plan, an employer shares company profits with employees, usually based on the level of each employee’s wages.
  • ESOP. Under an Employee Stock Ownership Plan, employees share in ownership of the company.
  • SEP. Simplified Employee Pension plans are used by small employers and the self-employed.

Make the Most of a Defined Contribution Plan

To help your employees make the most of your defined contribution plan, you should advise them to:

  • Study your employee handbook and talk to your benefits administrator to see what plan is offered and what its rules are. They should also read the summary plan description for specifics.
  • Join as soon as they become eligible.
  • Put in the maximum amount allowed.
  • If they cannot afford the maximum contribution, they should at least contribute enough to maximize any employer matching funds. This is essentially free money.
  • Study carefully the menu of investment choices. The more they know about their options and their investment goals, the more likely they will be to choose wisely.
  • Some companies match employee contributions with stock instead of cash. Caution them to not let their accounts get overloaded with company stock. Too much of a single stock increases risk.
  • Plan fees and expenses reduce the amount of retirement benefits an employee ultimately receives from the plans.  They should learn as much as they can about the plan’s administrative fees, investment fees, and service fees to maximize their return.

How RMC Group Can Help

Saving for retirement can be difficult if you don’t know where to start, but it doesn’t need to be! At RMC Group we specialize in working with business owners to find the best retirement plan that fits your needs.

If you are worried about the start-up costs to creating a plan, read our previous blog on how the government will pay you to start a pension plan.

Contact us today to discover how we can help you successfully set up a retirement plan at 239-298-8210 or [email protected].

This article is not intended to be exhaustive, nor should any discussion or opinions be construed as legal or financial advice. Design © 2016 Zywave, Inc. All rights reserved. Provided by RMC Group. Article adapted from the U.S. Department of Labor publication of the same title.