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Types of DC Plans

A Defined Contribution (DC) plan is a type of employer-sponsored retirement savings plan where the employee contribution is specified and fixed, as opposed to a Defined Benefit (DB) plan where the benefit amount is predetermined based on salary history and years of service. In a DC plan, the employer may also contribute to the plan or match a portion of the employee's contributions.

Types of Investment Options within DC Plans

DC plans typically offer various investment options to allow participants to diversify their retirement portfolios. Some common types include:

  • Target Date Funds (TDFs): These funds automatically adjust their asset allocation based on a predetermined retirement date, becoming more conservative as the target date approaches.
  • Balanced Funds: A mix of stocks, bonds, and other securities designed to provide a moderate level of risk and return.
  • Stock Funds: Investments in individual companies or sectors, offering potential for higher returns but also increased volatility.
  • Bond Funds: Investments in government or corporate debt securities, providing relatively stable income and lower risk.
  • Money Market Funds: Short-term investments in low-risk instruments such as commercial paper and treasury bills, designed to preserve capital.

Other Common Features within DC Plans

In addition to investment options, some common features of DC plans include:

  • Roth Contributions: Participants can make after-tax contributions to the plan, which may be subject to different tax rules upon withdrawal.
  • Loans: Some plans allow participants to take a loan against their account balance, often with interest and repayment terms.
  • In-Service Withdrawals: Rules governing withdrawals during employment, such as penalties or taxes owed on early distributions.