What is an Employee Contribution Plan?

by Investing School on December 22, 2012

There are several ways in which an employee can save for retirement, and an employee contribution plan is a popular way to do so. A company-sponsored retirement plan which allows employees to make deposits is a common form of employee contribution plan. Sometimes companies match payments made to the accounts by their employees.

The contributions made into such a plan are invested in one way or another. Commonly the employee can choose from a variety of funds which operate in the stock or bond market. The returns on the investments are then credited to the individual’s account. When the employee retires the account is used to provide retirement benefits. This might be in the form of an annuity or as a lump sum.

Defined contribution plans are the most common way that employers offer retirement benefits. They are less expensive than the more traditional defined benefit plans that used to be the standard in large businesses. These plans are portable and can be moved from employer to employer as the individual changes jobs. A rollover IRA can be used to transfer funds from one account to another.

There are risks associated with such plans for the employee. How well they invest their funds will determine their rate of return and how much is available upon retirement. Some plans guarantee that the employee will receive a payout that is no less than the amount they put in regardless of how their investments perform. All participants must receive complete disclosure of how their funds are managed and how their benefits will be paid out upon retirement.

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