by CI Staff
Traditional pensions, called defined-benefit plans because the employee is promised a specified amount in retirement based on years of service, have gradually been replaced among corporations by 401(k) and 403(b) retirement plans, called defined-contribution plans because the employee elects to set aside tax-deferred income for retirement on a regular basis. A 401(k) plan is offered by corporations to its employees, while a 403(b) is offered by nonprofit organizations, such as universities and charitable organizations. The switch from defined-benefit plans to defined-contribution plans shifts the responsibility to the employee to save for their retirement. However, recent studies have shown that investors are not taking full advantage of their 401(k) and 403(b) retirement plans. Some employees fail to contribute enough to maximize their employer’s matching programs, and others fail to make contributions at all.
The advantages of 401(k) and 403(b) plans include reducing taxable income by the amount contributed and delaying payment of income tax on the earnings until withdrawals are made. Deductions are automatically taken from paychecks, making it easier to save and less tempting to skip a contribution. In addition, many employers match contributions and some plans allow investors to take out loans. The number of investment options offered under these plans by companies is also steadily growing. Investors can now choose from a wealth of mutual funds to find one or a few that suit their needs.
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