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Chapter 4. No Plan Is an Island > Defined Contribution Plans

Defined Contribution Plans

Most of the businesses in our country are defined as small businesses. These companies represent 99 percent of all employers and over half the workforce in America. Yet many of these businesses cannot afford to provide defined benefit pension plans. For those companies, a variety of plans can be made available to employees at a very low cost. These plans all provide employees with the right to reduce their income by the amount that they invest in their retirement plan. By far, the most popular plan used today is the 401(k), with over 480,000 active plans covering 47 million people and representing over $1.8 trillion in assets. That's where we'll start our discussion on defined contribution plans.

401(k) Plans

401(k) plans have been around since the passage of The Revenue Act of 1978. In the eight years following its creation, Congress and the IRS fine-tuned the product to be essentially what we have today. Unlike a defined benefit plan, which pays a specified benefit, 401(k) plans are defined contribution plan. This means that both you and your employer make contributions to the plan on your behalf, and you manage the manner in which your money is invested, subject to the options provided you by your employer. In today's world, employees usually have at least a dozen options choose from. These are discussed in Chapter 12.


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