7 Most Popular Employer-Sponsored Retirement Plans

Daniel Penzing
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What Is an Employer-Sponsored Retirement Plan?

Here are seven types of employer-sponsored retirement plans.

A. A 401(k) plan is an employer-sponsored retirement plan. Eligible employees can choose to have a portion of their pretax income…

457(b) Plan

A. A 457(b) plan is a type of tax-deferred retirement plan available to governmental entities and tax-exempt organizations. Like other retirement plans, a 457(b) plan allows you to save and invest for retirement. There are many differences between a 457(b) plan and a 401(k) plan, including…

Profit-sharing Plan

A. A profit-sharing plan is a type of employer-sponsored retirement plan. In a profit-sharing plan, an employer uses part of its net earnings to set aside tax-deductible contributions…

Money Purchase Plan

A. A money purchase plan is a type of employer-sponsored retirement plan that allows an employee to contribute a fixed percentage of their pretax wages to the plan and allows the employer to make a matching contribution, based on a set formula…

Simple IRA

A. A simplified employee pension or (SEP) is a type of employer-sponsored retirement plan that…


Defined Benefit Pension Plans

The most common retirement plan for larger employers, a defined benefit pension plan pays a specific amount of money based on a formula that includes variables such as salary, length of service, and number of dependents. The benefit is generally based on the number of years of service (accumulation period) and the employee’s average earnings during that span.

The formula used for calculating your employer’s defined benefit pension plan is determined by the plan’s trust. A “defined benefit plan” is one in which the amount of money paid out is spelled out in advance in retirement plan.

In many cases, this is achieved through the purchase of a pension annuity. Defined benefit plans place the risk of investment loss on the employer.

401(k) Plan

A 401(k) plan (or 401k plan) is a retirement plan that allows people and businesses to save for retirement by offering tax benefits. Employees can contribute a portion of their salary every pay period and receive distributions in a number of different ways when they retire.

According to the IRS, employee contributions to 401(k) plans are not taxed in the year the employee makes the contribution. And although the contributions are made on an after-tax basis, the earnings are typically not taxed when withdrawn in retirement.

The employer may choose to make matching contributions to match each employee’s contribution up to a fixed percentage of employee compensation. One of the best ways to create an incentive for your employees is to match 401(k) contributions. Matching 401(k) contributions are an investment in your employees, and they have the potential to give your retirement plan a return.

Roth 401(k) Plan

Most employers that offer a 401(k) will offer a Roth 401(k), too. The Roth 401(k) offers investors many of the same benefits as the original 401(k), but with one important difference – taxes.

With a traditional 401(k), you contribute money pretax. That means you don’t have to pay income taxes on those funds right away. Instead, you pay the income taxes on them when you withdraw money from your 401(k) during retirement.

With a Roth 401(k), your contributions are made post-tax, so you’re paying income taxes on them now. The benefit, though, is that when you withdraw money from your account during retirement, you don’t have to pay taxes on it.

By paying income taxes upfront, you also lower the tax liability you’ll have to pay on that money when it’s withdrawn from your account.

What this means for investors is that you’ll lower your total taxes for retirement. And since you don’t pay income taxes on those funds when you withdraw them, you can simply keep more of your savings to spend during retirement.

403(b) Plan

457 Plan

A 457 plan is a defined contribution plan administered by a state or local government or 501(c)(3) non-profit organization. The funds contributed are invested by the employer or plan administrator on behalf of the employee. The money is invested into a variety of stocks, bonds, mutual funds, and other qualified investments. Well unlike most retirement plans this one is made to give you a shot at starting a business venture, extending the length of time you can work.


SEP Plan

If your employer has 100 or fewer employees, it can easily choose to operate a SEP plan for you. As a self-managed plan, the employer contributes a set percentage of your annual compensation, without setting a limit. This percentage can vary from year to year, and it is subject to a current annual maximum. Thanks to this flexibility, this is the most commonly used retirement plan in the United States. Because the employer covers most of the administrative costs and manages contributions, the plan can be set up and started in a relatively short time frame.

A SEP-IRA works exactly the same way as a SEP, except that it lets employees contribute up to 25% of their annual compensation.