Defined Contribution Plans: Final Project Paper

Defined Contribution Plans: Final Project

Defined Contribution Plans: Final Project
Blake Hoster
Wayland Baptist University
Abstract
The purpose of this final project is to provide a general overview of defined contribution plans. The research was done in this final project with the intention of helping readers develop a better understanding of defined contribution plans. After reading this final project, readers should have enough knowledge to begin enhancing their contributions to the plan.
Defined Contribution Plans Final Project
Defined contribution plans are a type of retirement plan in which the employer, employee or both make fixed contributions on a regular basis. “A revolution in the retirement landscape
Fixed Employee Percentage Cost—This is the most common strategy used by many employers for decades. Employers using this method target a percentage of premiums that employees will pay.
Pay-Based Contributions—An emerging strategy where an employee’s pay determines his or her level of contributions.
Shared Increase Contributions—A strategy employed where employees are required to pick up a fixed percentage (i.e., 60%) of cost increases. Using this strategy typically increases employee contributions as a percentage of premiums over time in periods of rising costs.
Employee Out-of-Pocket Sharing—An emerging strategy where employees’ contribution requirements are added to their projected portion of out-of-pocket cost sharing (deductibles, copays, coinsurance, etc.). Employers using this method are attempting to balance an employee’s true out-of-pocket costs.
Defined Employer Dollar Cost—Employers using this method “fix” an employer cost each year and employees make up the difference from projected total premium
The average 401(k) balance is $80,900 ' while the average for workers reaching retirement age is $200,000 (Tucker, 2013). Under the plan, retirement savings contributions are provided (and sometimes matched) by an employer, deducted from the employee 's paycheck before taxation and limited to a maximum pre-tax annual contribution of $17,500 (as of 2013). Employees can make contributions to the 401(k) on a pre-tax or post-tax basis. For pre-tax contributions, the employee does not pay federal income tax on the amount of current income he or she defers to a 401(k) account. If employees made after-tax contributions to the non-Roth 401(k) account, these amounts are commingled with the pre-tax funds and simply added to the non-Roth 401(k) basis. Virtually all employers impose severe restrictions on withdrawals of pre-tax or Roth contributions while a person remains in service with the company and is under the age of 59½. Many plans also allow employees to take loans from their 401(k) to be repaid with after-tax funds at pre-defined interest