When you join a defined contribution (DC) plan, your employer will set up a plan account for you. Contribution formulas for DC plans vary. But they are generally made up of the following 4 elements:
- Employer-required contributions – Your employer contributes a set amount each pay period, typically based on a percentage of your pay.
- Employee-required contributions – Some plans require you to contribute as well, based on a percentage of your pay.
- Employee voluntary contributions – Most plans allow you to contribute additional amounts on a voluntary basis.
- Employer matching contributions – Some plans encourage you to save more by “matching” some or all of your voluntary contributions.
Entitlement to employer contributions: Some plans require you to be a plan member for a certain length of time (2 years is typical) before you are entitled to benefits related to your employer’s contributions (and related investment earnings). This is called “vesting.” If you leave the plan before you are vested, you will always get your own contributions back, plus or minus your investment earnings.
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