Defined Contribution Plans provide for a fixed or discretionary contribution to an account balance maintained on behalf of each employee. Plans with a 401(k) employee savings feature allow employees to contribute a portion of their compensation to the plan. Some employers match employee 401(k) contributions. The ultimate retirement benefit is based upon the periodic distributions which can be provided by the accumulated account balance upon retirement.
| Year | Compensation | Contribution | Invest Income | Ending Balance |
| 2004 | 29,000 | 870 | 0 | 870 |
| 2005 | 30,000 | 900 | 44 | 1,814 |
| 2006 | 31,000 | 930 | 91 | 2,835 |
| 2007 | 32,000 | 960 | 142 | 3,937 |
| 2008 | 33,000 | 990 | 197 | 5,124 |
| 2009 | 34,000 | 1,020 | 256 | 6,400 |
| 2010 | 35,000 | 1,050 | 320 | 7,770 |
| 2011 | 36,000 | 1,080 | 389 | 9,239 |
| 2012 | 37,000 | 1,110 | 462 | 10,811 |
| 2013 | 38,000 | 1,140 | 541 | 12,492 |
An example of a defined contribution plan is as follows:
Annual compensation: Ranges from $29,000 to $38,000
Years of service at age 65 retirement: 10 years
Contribution formula: 3.0% of an employee's compensation
Investment income net of fees: 5.0% per annum
Approximate benefit which can be provided at age 65: $98¹ per month
The following is an illustration of contributions to a very basic defined contribution plan with a Social Security integrated formula providing 5.7% of compensation, plus 5.7% of compensation above the Social Security wage base ($113,700 for 2013).
| Employee | Age | Annual Compensation Rate |
Base Employer Contribution |
Integrated Employer Contribution |
Total Annual Contribution |
| Principal | 40 | 255,000 | 14,535 | 8,054 | 22,589 |
| Sub-total | 255,000 | 22,589 | |||
| Staff1 | 35 | 45,000 | 2,565 | 0 | 2,565 |
| Staff2 | 30 | 40,000 | 2,280 | 0 | 2,280 |
| Staff3 | 25 | 35,000 | 1,995 | 0 | 1,995 |
| Sub-total | 130,000 | 6,840 | |||
| Grand Total | 385,000 | 29,429 | |||
| Ratio of Pirincipal to Employee | 3.3 to 1 |
With only small additional complexity and expense, this employer could consider a Safe Harbor 401(k) Profit Sharing Plan which would allow the principal to contribute an additional $17,500 per year as an employee contriubtion and would allow his or her employees to do the same.
¹ Based on Group Annuity 1983 Unisex Mortality and 6.00% per annum interest.