U.S Retirement Plans Essay

868 words - 4 pages

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NameCourseProfessorDateUS Retirement PlansA retirement plan can be defined as a financial arrangement that is designed to replace one's employment income when the he or she stops working (Friedberg and Webb 282).The retirement plan can be set up or arranged by employers, trade unions, insurance companies, the government, and other institutions that are concerned with employee's welfare. The congress has continued to encourage people to practice responsible retirement planning through favorable tax treatment to the various retirement plans. In the U.S, the Internal Revenue Service (IRS) code defines retirement plans in tax terms. Provisions of the Department of ...view middle of the document...

On the other hand, the defined contribution plan gives an assurance of fixed contributions to pension funds. For instance, 4% of an employee's salary could go to the pension fund. Within the two categories of pension plans are varieties of specific types of retirement plans (Poterba et al 2069).The cash balance plan falls under the category of defined benefit plan. When an employee with this type of retirement plan retires, the benefits that the person receives are determined on the basis of an account balance. Any increases or decreases that occur in the value of the investments of the plan have no direct effect on the benefits amounts that the participant has been promised (Topa et al 52). This implies that the employer bears all the risk and rewards associated with the investment of the plan.An example of a retirement plan under the defined contribution category is the profit sharing plan. In this plan, contributions are discretionary and are based on the profits of the company. There is a specific formula for determining the division of the contributions among the participants (Poterba et al 2082). One of the most famous retirement plans is the 401(k) plan. This is a deferred type of plan where employees can defer to receive a part of their salary. The portion of the salary is contributed before taxes to the plan, on the behalf of the employees. Employers match the contribution of the employee up to a specific percentage of the annual salary of the employee...

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