There is no one size fits all employer-sponsored retirement plan. Instead, there are many options out there, and the best one for you depends on a number of factors. In general, an employer-sponsored retirement plan provides useful benefits to both employees and employers. These plans include things like automatic paycheck dedications transferred to savings, tax breaks and some companies even offer to match employee contributions up to a certain amount.
Two Main Categories Of Employer-Sponsored Retirement Plans
There are two main categories that define retirement plans: a defined benefit plan and a defined contribution plan.
A defined benefit plan provides a guaranteed monthly benefit amount at the time of retirement. Also known as pension plans, defined benefit plans are sponsored by employers whom generally hire investment managers to handle accounts. The employer takes on the risk in this type of plan.
A defined contribution plan does not offer the same guaranteed payout at the time of retirement. A 401(k) is an example of a defined contribution plan. These types of plans include contributions from both employer and employee, often at a set percentage rate of an employee’s annual salary. The employee takes on the risk in this type of plan. The overall value of the account will change based upon the value of investments. At the time of retirement, employees receive the account balance based upon contributions plus or minus gains and losses from investments.
Common Types Of Retirement Plans Offered By Employers
There are many types of retirement plans including 401(k) plans, 457 plans, Roth 401(k) plans, SIMPLE plans, 403(b) plans and many more. Talking the options over with a certified accountant will help you to determine the best plan for you.
1. 401(k) Plan
This is the most common type of employer-sponsored retirement plan. Most large, for-profit businesses offer this type of plan to employees. The employee is responsible for funding this plan but many companies offer to match a certain percentage of employee contributions. Employees have the opportunity to select which investments their money goes towards and retain complete control of the account at the time of retirement.
Employee contributions are eligible for annual tax deductions up to $18,000 as of 2016. If you are 50-years or older you are granted a catch-up provision that allows you to contribute an additional $6,000 per year. You pay tax on the money when you go to withdraw it from your 401(k).
Related Article: 7 Things You Need To Know About Your 401(k)
2. Roth 401(k) Plan
This type of plan offers the same benefits as a traditional Roth IRA with the same employee contribution limits as a traditional 401(k) plan. A Roth 401(k) does not offer tax-deductions for contributions, but when you withdraw this money during retirement you will not pay tax as long you are over 59 ½ years old and have maintained money in the account for a minimum of 5 years.
Employees can offer to match contributions to a Roth 401(k), but these contributions must be placed into a regular 401(k). Employee contribution limits remain the same for both Roth 401(k) and 401(k) plans. If you have both a 401(k) and a Roth 401(k), combined contributions to both accounts cannot exceed the maximum contribution allowed to a standard 401(k) plan.
3. 403(b) Plan
A 403(b) plan is virtually the same thing as a 401(k) plan, but it is designated for nonprofit organizations such as hospitals, public school systems, churches and so forth. Employees largely fund these plans, and contributions come with tax deductions up to a specified amount. Employers have the option to match contributions based on a certain percentage. At the time this money is taken out of the account it is subject to taxation.
4. SIMPLE Plan
SIMPLE (Savings Incentive Match Plan for Employees) is an IRA plan typically offered by smaller businesses. Employees make tax-deductible contributions to the plan and employers match contributions up to 3% of the employee’s salary, or make nonelective contributions.
The max amount of money you can contribute to a SIMPLE IRA plan in 2016 is $12,500. If you are 50-years or older the maximum amount goes up to $15,500 (or an additional $3,000).
These four plans are far from your only options. Allow DGK Group to assist you in finding the right employer-sponsored retirement plan for you.
FAQs
Employer-sponsored plans can include 401(k) plans, SIMPLE IRAs, SEP plans, profit-sharing plans, employee stock ownership plans, 457 plans, cash-balance plans, and non-qualified deferred compensation plans.
What are the four types of employer-sponsored retirement plans? ›
Employer-sponsored plans can include 401(k) plans, SIMPLE IRAs, SEP plans, profit-sharing plans, employee stock ownership plans, 457 plans, cash-balance plans, and non-qualified deferred compensation plans.
Which of the following are the most common employer-sponsored retirement plans? ›
By making contributions from your paycheck automatic, you are more likely to reach your retirement goals. A 401(k) plan is the most common employer-sponsored account. Others available include 403(b) plans for public education organizations and nonprofits and 457 plans for government employers and workers.
What are the three most common types of retirement plans? ›
Although 401(k) plans and IRAs are among the most common, they are far from the only options available. Other types of retirement savings accounts include: 403(b) and 457(b) plans.
Which type of fund is commonly available through employer-sponsored retirement plans? ›
Employer-sponsored savings plans such as 401(k) and Roth 401(k) plans provide employees with an automatic way to save for their retirement while benefiting from tax breaks. The reward to employees who participate in these programs is they essentially receive free money when their employers offer matching contributions.
What is the most common retirement plan offered by employers? ›
401(k) Plan
Most large, for-profit businesses offer this type of plan to employees. The employee is responsible for funding this plan but many companies offer to match a certain percentage of employee contributions.
What are the 4 types of retirement? ›
Overview
- Voluntary Retirement. Voluntary Retirement – The most common type of retirement. ...
- Early Retirement. ...
- Disability Retirement. ...
- Deferred Retirement. ...
- Phased Retirement.
Employee benefits
Employee contributions can reduce current taxable income. Contributions and investment gains are not taxed until distributed. Contributions are easy to make through payroll deductions. Interest accrues over time, which allows small, regular contributions to grow to significant retirement savings.
Is a 401k an example of an employer-sponsored retirement plan? ›
A 401(k) is an employer-sponsored retirement plan that comes with tax benefits. Basically, you put money into the 401(k) where it can be invested and potentially grow tax free over time. In most cases, you choose how much money you want to contribute to your 401(k) based on a percentage of your income.
What is the difference between ERISA and non ERISA? ›
ERISA stands for Employee Retirement Income Security Act, which is a federal law that sets minimum standards for retirement plans in the private sector. Non-ERISA plans, on the other hand, are not governed by ERISA and are not subject to its regulations.
An employer sponsored plan is an option included in a benefits package that provides a specific service to employees at either no cost or a significantly reduced cost.
What is the high 3 retirement plan? ›
If you joined between Sept. 8, 1980 and July 31, 1986, you can use the High-3 Calculator to figure out your estimated base pay. This retirement plan offers a pension after 20 years of service that equals 2.5% of your average basic pay for your three highest-paid years or 36 months for each year you serve.
What is the 3 rule in retirement? ›
In some cases, it can decline for months or even years. As a result, some retirees like to use a 3 percent rule instead to reduce their risk further. A 3 percent withdrawal rate works better with larger portfolios. For instance, using the above numbers, a 3 percent rule would mean withdrawing just $22,500 per year.
Which of these options is a type of employer-sponsored retirement plan group of answer choices? ›
A 401(k) plan is an employer-sponsored retirement plan that allows a company's workers to save for retirement on a tax-advantaged basis. In a 401(k), money can grow tax-deferred or tax-free until withdrawn at retirement.
What type of employer-sponsored retirement plan is available to nonprofit organizations? ›
Though 401(k)s are primarily offered by larger for-profit companies, many nonprofit entities also offer 401(k) plans to their employees. In fact, many nonprofit organizations may choose to offer both a 401(k) and a 403(b).
What are two categories of employer-sponsored retirement plans quizlet? ›
Cornerstones of Financial Accounting
- What are the two types of Employer-Sponsored Qualified Plans? ...
- Defined Benefit Plan. ...
- Defined Contribution Plan. ...
- What are the characteristics of a defined benefit plan that qualify it for federal tax purposes? ...
- What is the benefit amount based on for defined benefit plans?
The major types of 401(k) plans are traditional 401(k)s and Roth 401(k)s. Smaller employers may offer you a SIMPLE retirement account, or a safe harbor 401(k) plan.
What are the different types of employer 401k? ›
There are several types of 401(k) plans available to employers - traditional 401(k) plans, safe harbor 401(k) plans and SIMPLE 401(k) plans. Different rules apply to each. For tax-favored status, a plan must be operated in accordance with the applicable rules.
What is 403b vs 401k? ›
403(b) plans and 401(k) plans are very similar but with one key difference: whom they're offered to. While 401(k) plans are primarily offered to employees in for-profit companies, 403(b) plans are offered to not-for-profit organizations and government employees.
How are IRAs different from 401(k), 403(b) and pension accounts? ›
Essentially, you open an IRA yourself at a financial institution of your choice. By contrast, 401(k) plans are available through employers. Similar to 401(k)s, 403(b)s—for nonprofit, education, and health care workers—and 457s—for government workers—are also employer sponsored.
