Merrill Lynch 401k Plans » 401k Plan Participant

A defined contribution retirement plan offers an individual retirement account to each of the participants in the plan. The benefits from such a retirement plan are based on how much is contributed to the account. It is also affected by the retirement plan owners’ income, their expenses, as well as the losses and the gains of the investment vehicles used by the plan.

There are various types of defined contribution retirement plans. A 401(k) is probably the best known, as it’s the most widely participated in of the defined contribution plans. Others are 403(b) plans, employee profit sharing plans, and stock ownership plans for workers.

A defined benefit retirement plan makes a commitment to the participant to provide a specified monthly benefit at the time of retirement. This might or might not be stated as an exact dollar figure. The monthly benefits of such a retirement plan might also be calculated by a formula that includes calculations for the particular participant’s years of service and salary. While a private sector fund does not usually require contributions from the participants most public sector funds do. Unlike defined contribution plans, the defined benefit retirement plan participant does not need to have a hand in investment decisions – and in fact is generally restricted from doing so.

With defined benefit plans, the retirement income is guaranteed, there is no investment risk, there are adjustments for cost of living and the retirement savings is tax deferred.

In defined contribution plans the retirement savings are tax deferred as well, but participants have some control over how much they will save, and it can be paid through deductions from payroll. Lump sum distributions to a defined contribution retirement plan might be eligible for 10 year tax averaging, and the investment results have no ceiling.

Jeanette Pollock is a freelance author and website owner. She publishes articles and reports in various ezines and also contributes on a regular basis to FreeNetPublishing.com.

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