Considerations for defined contribution plans
As already noted, much more common these days are defined contribution plans such as 401(k) plans that don't promise a specific pension-type benefit. They have become more popular options for small businesses and their employees.
Some defined contribution plans are subject to annual testing to ensure the amount of contributions made on behalf of the rank-and-file employees is proportional to contributions made on behalf of owners and managers or highly compensated employees. These plans are also required to file an annual report with the federal government showing details about the plan and its operation. But other qualified plans don't require annual testing.
Below are some variables to consider when deciding among various plans.
- Are employer contributions optional or required?
- Are employee contributions allowed?
- Are plan documents required?
- Are annual returns required?
- Is annual nondiscrimination testing required?
- Are catch-up contributions available to age 50-plus participants?
- Are plan loans allowed?
- Does the plan sponsor, or employer, have fiduciary responsibility to put the employees' interests above its own?
- Does the plan require a third-party administrator because of its complexity?