Employer Vs. Employee Directed Retirement Plans
Planning ahead for retirement is essential if you want to live a comfortable life once you stop working. Depending on where you work, you may have access to an employer directed retirement plan or an employee directed retirement plan. Both of these plans can help you retire, but there are a few key differences between them.
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Contributions
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One of the biggest differences between these two types of retirement plans lies in who makes the contributions to them. With an employer directed plan, the employer contributes money to the plan on behalf of the employee. With the employee directed retirement plan, the employee is responsible for making his own contributions to the account. With the employee directed plan, the employee needs self-discipline to ensure that enough money makes its way into the account.
Investment Decisions
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Another key difference between these two types of accounts comes with who controls the investment decisions. With the employer directed retirement account, the employer gets to determine the exact nature of the investments. Typically, the employer will hire a fund manager to watch over the retirement plan and make all of the investment decisions. With the employee directed plan, the employee is in charge of making her own investment decisions. The employee needs to research investments and choose the best ones for her own portfolio.
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Responsibility
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With an employee directed retirement account, the employee needs to generate enough money to retire comfortably. This is done by making contributions and choosing the right types of investments. With the employer directed retirement account, the employer must come up with enough money for its employees to retire. If the investments perform poorly, the company has to make up the difference to give the defined benefit to employees. Employees simply have to put in their time at work in order to receive a specific retirement package.
Insured
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When an employee directs her own retirement plan such as with a 401(k), there is no guarantee associated with the account. With the employer directed retirement account, the pension fund is insured. If the company goes out of business, the Pension Benefit Guaranty Corporation will step in and pay the pension benefits to the employees.
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