What Defines a Defined Contribution Plan?
Common Types of Defined Contribution Plans
- 401(k) Plans: The most common type of plan offered by private-sector employers. It allows employees to contribute a portion of their wages to individual accounts.
- 403(b) Plans: Similar to a 401(k), but specifically designed for employees of public schools, certain non-profits, and religious organizations.
- 457(b) Plans: These are typically available to state and local government employees, as well as some highly compensated employees at non-profits.
- Thrift Savings Plan (TSP): A defined contribution plan specifically for federal employees and members of the uniformed services.
The Importance of Employer Matching
Understanding Vesting Schedules
- Immediate Vesting: You own 100% of the employer’s contributions as soon as they are made.
- Cliff Vesting: You become 100% vested only after a specific period of service, such as three years. If you leave before that time, you forfeit the employer’s portion.
- Graded Vesting: Your ownership of employer contributions increases gradually over time (e.g., 20% after two years, 40% after three years, and so on).