Lesson 6 The Basic Defined Contribution Plan
The “vanilla” DC plan is also called a Money Purchase Pension Plan (MPPP). The plan sponsor simply contributes to an account according to a formula, usually based on compensation. The account grows until the employee either terminates or retires. Then, the vested balance is turned over to the employee, often as a lump sum or, alternatively and less frequently, as an annuity. This type of design clearly benefits younger employees who have a long time for the account to grow before it is needed.
Defined contribution plans offer a powerful combination of benefits to both sponsor and participant, as follows:
• The contribution is fully tax-deductible for the sponsor, and not taxable for the employee. ...
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