How Do 'Contributions' Factor Into the Value of My Retirement Plan?

Jessica W. of Pennsylvania asks: "How Do 'Contributions' Factor Into the Value of My Retirement Plan?"

Spencer, in the Pension Department, of Pension Evaluators & QDROS Of Troyan, Inc Associates Groupanswers:"In general Contributions are utilized to fund the Plan. If one leaves their employment prior to becoming 'vested,' one should anticipate receiving a return only on their contributions. In a traditional defined benefit pension plan, the employer makes contributions for the covered group. Contributions are not made on an individual basis; a pooled fund of assets provides benefits when they come due, although the plan may allow employee contributions.

If so, a separate account is maintained for employee contributions and investment growth thereon. The plan may include the employee contributions (if any) in its funding of benefits, providing no additional benefits, or the employee money may be used to increase benefits. A plan with employee contributions should be reviewed to see if benefits are affected.

In a defined contribution plan, employer contributions are immediately allocated to the individual accounts of the participants. If there are employee contributions, they may go into the same account or into a subaccount earmarked for the person. Contributions to a defined contribution plan result in eventual benefits. In a defined benefit pension plan, there is no direct relationship between contributions and benefits."

Spencer Olsen

Lead Pension Analyst