DEFINED plans, primarily due to the expense and long-term



A defined contribution plan specifies how much money will go into a
retirement plan today. The amount typically is either a percentage of an
employee’s salary or a specific dollar amount. Those funds often are invested
in mutual funds or annuities available inside the retirement plan. The amount
you have at retirement depends on how much (fi anything) your employer
contributes to the plan, how much you as the employee save in the plan, how
long you leave those funds invested, and how well your investments perform
inside the plan.

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More and more employers are replacing defined benefit plans with
defined contribution plans, primarily due to the expense and long-term
obligations associated with running a defined benefit plan. If you have a
defined benefit plan through your employer, be sure to regularly let your
employer know that you really appreciate your retirement plan; it’s a benefit
well worth keeping.


Central Government employees in India who joined after January 1, 2006
participate in National Pension Scheme which is defined contribution plan run by Pension Fund Regulatory Authority of India. Earlier employees were under Defined Benefit Plan.

Government and Private sector organizations had to offer Provident Fund (PF)
which is a type of Defined Contribution Plan. The NPS which was started in 2006
is a recent option given to all Central Government employees. The % of
contribution made by the employer and employees are mandated by the
regulations. Additionally employees are given the ability to opt for an
additional contribution if they so desire. All contributions are managed by the
PF authority. PF authority choose the investment vehicle, however the
beneficiaries are given a standard % of returns on their contribution.
Some large private sector organizations have also formed their Trust to manage
the contributions received from its employees.




The New Pension Scheme
works on defined contribution basis and will have two tiers  Tier-I and II. Contribution to Tier-I is
mandatory for all Government servants joining Government service on or after
1-1-2004 (except the armed forces in the first stage), whereas Tier-II will be
optional and at the discretion of Government servants.

In Tier-I, a Government servant will have to
make a contribution of 10% of his basic pay plus DA, which will be deducted
from his salary bill every month by the PAO concerned. The Government will make
an equal matching contribution. However, there will be no contribution from the
Government in respect of individuals who are not Government employees.

Tier-I contributions (and
the investment returns) will be kept in a non-withdrawable Pension Tier-I
Account. Tier-II contributions will be kept in a separate account that will be
withdrawable at the option of the Government servant. Government will not make
any contribution to Tier-II account.

The existing provisions
of Defined Benefit Pension and GPF would not be available to the new recruits
in the central Government service, i.e. to the Government servants joining
Government service on or after 1-1-2004.

In order to implement the
Scheme, there will be a Central Record Keeping Agency (CRA) and several Pension
Fund Managers (PFM) to offer three categories of Schemes to Government
servants, viz., options A,B and C based on the ratio of investment in fixed
income instruments and equities. The participating entities (PFMs and CRA)
would give out easily understood information about past performance, so that
the individual would be able to make informed choices about which scheme to

An independent Pension
Fund Regulatory and Development Authority (PFRDA) will regulate and develop the
pension market.

As an interim
arrangement, till such time the Statutory PFRDA is set up, an interim PFRDA has
been appointed by issuing an executive order by M/o Finance (DEA).

Till the regular Central
Record Keeping Agency and Pension Fund Managers are appointed and the
accumulated balances under each individual account are transferred to them,
such amounts representing the contributions made by the Government servants and
the matching contribution made by the Government will be kept in the Public
Account of India. This will be purely a temporary arrangement as announced by
the Government.

Tier-II will not be made operative during the
interim period.

A Government servant can exit at or after the
age of 60 years from the Tier-I of the Scheme. At exit, it would be mandatory
for him to invest 40 per cent of pension wealth to purchase an annuity (from an
IRDA-regulated Life Insurance Company) which will provide for pension for the
lifetime of the employee and his dependent parents/spouse. He would receive a
lump-sum of the remaining pension wealth which he would be free to utilize in
any manner. In the case of Government servants who leave the Scheme before
attaining the age of 60, the mandatory annuitization would be 80% of the
pension wealth.


Under the defined
contribution plan contribution of employer and employee is defined. This plan
seeks and runs on the contribution as per agreement and makes available the
accumulated balance at the end of period. These plans have offered better
transparency and portability to employees and employer to meet the change in
corporate world.

 Employees’ Provident Fund and Miscellaneous
Provisions Act,1952

 Applicable to whom?

Every establishment which is a factory and 20
or more persons employed.

Any other establishment with more than 20

Other establishment as the central Government
may notify

Employee Eligibility:

Employed through a contractor

Engaged as an apprentice, not being an
apprentice engaged under the Apprentice Act, 1961

Once the Act applies to
any establishment, it continues to apply even if the number of employees working
there falls below 20 there

Employee Coverage:

The scheme excludes any
employee who is:

A casual employee

An employee whose pay is more than Rs. 6500
per month

An employee who is drawing pay of more than
Rs. 6500 can become member with permission of Assistant PF Commissioner.

A person who is already a member continues to
be a ‘member’ even if his pay exceeds Rs. 6500.


The employee contributes 12% of

Basic wages + DA + Cash value of any food
concession + Retaining allowance

Retaining Allowance: Allowance paid to an
employee for retaining his service when establishment is not working

The rate of contribution is 10% in case of
certain establishment like sick industrial company etc

 Allocation of Contribution:



The interest is credited to member’s account on
monthly running balance basis

Currently the rate of interest is 8.5%

The interest rate is declared every year
during March/April by central Government in consultation with Central Board of
Trustees of PF


Employee’s contribution is allowed u/s 80C

Employer’s contribution is excess of 12% forms
a part in gross salary

Interest up to 8.5% is exempt from tax

Any excess interest above such limit forms a part in gross salary


Amount can be withdrawn
in full

On retirement

On retirement on account of permanent
incapacity to work

Immediately before migration from India for
permanent settlement

On termination of service in case of mass or
individual retrenchment


After 2 months of resignation, in case of no

Advance from the Fund:

Purchase of dwelling site

Construction of dwelling house

Buying of dwelling house

For illness of member of his family

For marriage

Property damage due to natural calamity etc.

How does defined contribution
plan work?

All defined contribution plans basically work the
same way. You decide how much you want to contribute, and your employer puts
the money into your individual account on your behalf. The investment happens
through payroll deduction: You decide what percentage of your salary you’d like
to contribute and, from then on, that amount comes straight out of your
paycheck and goes into your account automatically, without you having to lift a
finger. Your paycheck will be smaller as a result – though not as small as you
might think, thanks to the tax benefits involved.


You decide what you want the money in your plan to
be invested in. Your employer’s plan will have a limited selection of
investments for you to choose from. When you leave your job, you still maintain
ownership over your account.


Many employers also agree to kick in some of their
own money once you’ve decided to put your money in. This is known as a matching contribution. Many employers kick in 50 cents for every dollar
you contribute, up to a certain percentage of your salary (perhaps 3% to 6%).
So, if over the course of the year you contribute $3,000, your company would
put in $1,500.


Types of
defined contribution plans


401(k)s and
similar plans – 403(b)s, 457s and Thrift Savings Plans – are ways to save for your retirement that
your employer provides, or “sponsors.” You may hear people describe
them as “defined contribution plans.” That name comes from the fact
that you make contributions to the plans –
that is, you put your own money into them. (You may also hear your employer
describe the plan simply as “The Company X Savings Plan.”)


Here’s how they break down:


are the version that corporations offer to their employees. (Roth 401(k)s are
a subgroup that has different tax treatment.)

are for employees of public education entities and most other nonprofit

457s are
for state and municipal employees, as well as employees of qualified

Savings Plans (TSPs) are for federal employees.

401(k) plans are the most common type of defined
contribution plan, so they’re what you may read and hear about most often. But
in fact there are no huge differences between a 401(k) plan and the other
defined contribution plans (beyond who can use them, of course).


What is 401(K) plan?

A 401(k) plan is a retirement plan offered to you
through your employer. 401(k)s are the most common kind of defined contribution retirement plan.


Here’s how it works: You decide how much you want
to contribute, and your employer puts the money into your individual account on
your behalf. The investment happens through payroll deduction: You decide what
percentage of your salary you’d like to contribute and, from then on, that
amount comes straight out of your paycheck and goes into your account
automatically, without you having to lift a finger. Your paycheck will be
smaller as a result – though not as small as you might think, thanks to
the tax benefits involved.


Your company serves as the “plan sponsor”
for the 401(k), but it doesn’t have anything to do with investing the money.
Instead, the plan sponsor hires another company to administer the plan and its
investments. The plan administrator may be a mutual fund company (such as
Fidelity, Vanguard or T. Rowe Price), a brokerage firm (such as Schwab or
Merrill Lynch) or even an insurance company (such as Prudential or MetLife).


Your employer sends your payroll deductions
directly to the company managing your plan. But you are responsible for
deciding how to invest your money among the options offered by your plan.
Typically, a 401(k) offers five or more mutual funds that
invest in various sectors of the financial markets. Some 401(k) plans also
offer shares of your employer’s stock


What is
the tax benefit through 401(k) plan?


You fund 401(k)s (and
other types of defined contribution plans) with “pretax” dollars,
meaning your contributions are taken from your paycheck before taxes are
deducted. That means that if you fund
a 401(k), you lower the amount of income you have to pay taxes on, which can
soften the blow to your take-home pay. For example, if you put $100 into your
401(k) each month, your paychecks might only get smaller by about $60-$80 per
month. (The exact amount will vary depending on your salary and tax bracket.)


So if you make a small contribution to a 401(k), or
if you increase your contribution by 1% or so a year, chances are you’ll hardly
even notice the difference in your pay checks, and your tax bill will be lower.
You will have to pay taxes eventually of course, but not until you retire. The
IRS taxes all withdrawals at your ordinary income tax rate. But there’s a
catch: if you make withdrawals before age 59 ½, you typically have to pay a 10%
early withdrawal penalty on top of any taxes due. That can take a huge chunk
out of your nest egg, and is usually a bad idea.


There’s also a type of 401(k) plan called the Roth 401(k), which
offers a tax break that essentially acts as the reverse of the traditional 401(k): You do have to pay tax on your contributions, but you won’t have to
pay any tax when you withdraw the money in retirement. So all the money in your
account grows tax free.



How much
can we contribute to 401(k) plan


Given the plans’ valuable tax breaks, it makes
sense to invest the maximum if you can. There are annual limits. In 2016, if
you are under 50 years old, you can contribute a maximum of $18,000. If you’re
50 or older, you can make an additional catch-up contribution of as much as
$6,000, for a total of up to $24,000. Those contribution limits change annually
to track inflation. The reason: Inflation will gradually reduce the value of a
dollar, meaning you will need to contribute more dollars to have the same
purchasing power.


Try to contribute at least enough to qualify for
your company’s maximum matching contribution. Research shows that about one
quarter of 401(k) participants don’t contribute enough to qualify for the
maximum matching contribution from their employer. Your Human Resources
department can tell you how much you need to contribute in order to get the
greatest match. Do it!




Lots of defined contribution plans come with a
bonus: a matching contribution from your company. The match can often be 50
cents to a dollar for every dollar you contribute, up to a set maximum –
perhaps 3% to 6% of your salary, or in some cases a dollar limit. The match is
free money! And it effectively increases your income without increasing your
tax bill, since you pay no taxes on matching contributions until you withdraw
them in retirement.

The employer’s match money typically
“vests” over three or four years, meaning you have to keep working
for the company for that amount of time before all the matching funds are yours
to keep.


between 401(k) and Roth 401(k) plans


Roth 401(k) is a relatively new option that some
employers offer along with a traditional 401(k). It’s basically the opposite of a traditional 401(k) plan – meaning you
pay the taxes on your contributions, but not your withdrawals. So while you do
have to fund it with after-tax dollars, the money grows tax free and you won’t
have to pay income tax on any money you take out.


Roth 401(k)s are subject to required minimum
distribution rules. So after you turn 70 ½, you will be required to start withdrawing
money from the account. If your employer offers both types of plans, you can
divide your savings among them – they will have the same investment options –
but your combined annual contributions cannot exceed $18,000 in 2016 ($24,000
for people 50 or older).


What is
403(b) plan?


A 403(b) plan is a kind of defined contribution retirement plan. It may be offered to employees of government and
tax-exempt groups, such as schools, hospitals and churches.

Employees who are eligible can defer money from
their paychecks into their 403(b) accounts, which work the same as way as 401(k) plans. 403(b)
plans are also sometimes offered as Roth versions.


The main difference is the type of employers who
can offer them. Unlike 401(k) plans which
are offered by for-profit companies, 403(b) plans are only available to
employees of tax-exempt organizations. These are usually either schools,
hospitals or religious groups. The names simply refer to the section of the tax
code that outlines these plans.

For the most part, the two types of plans work the
same way. While 403(b) plans historically offered more limited investment
choices than corporate plans, they’ve recently begun offering a broader array
of investment options. And while 401(k)s frequently have vesting schedules
spread out over a few years, many 403(b)s vest immediately, or over a shorter
period of time than in their cousins in the for-profit world.


You can contribute a maximum of $18,000 in 2016 if
you are younger than 50 years old. If you are 50 or older, you can make an
additional catch-up contribution of as much as $6,000, for a total of up to
$24,000. Those contribution limits are scheduled to adjust annually in line
with inflation.


Employees who have worked for the same nonprofit
for 15 years may also have access to an additional “catch up provision” of
$3,000 per year for up to five years, if they contributed an average of less
than $5,000 per year previously.


When investing
for a long-term goal such as retirement, you typically want to emphasize
stocks, which have the best chance to generate returns that outpace inflation.
Adding some bonds or cash to your mix can help reduce your investments’ overall
volatility. See the Investing section for more on investment strategies. You can also use our asset allocator and retirement planner calculators to determine the best mix of stocks, bonds and
cash for your retirement money.


What is a
457 plan?


A 457 plan is a kind of defined contribution retirement plan available to state and local public
employees, but can also be offered by certain nonprofit organizations. They
work much the same way as 401(k) plans: you can
opt to divert part of your salary into the plan, and the money is automatically
deducted from your paycheck before taxes are taken out. The money grows
tax-deferred until it’s withdrawn, and then Uncle Sam comes calling.

However, there are differences in the maximum
annual contribution limits and the treatment of early withdrawals.


If the 457 plan is the only one your employer
offers, the limits are the same as with a 401(k) – a maximum of $18,000 in 2016
for those under 50 years old, and up to $24,000 for those 50 and over.


But here’s the difference: If your employer also
offers a 401(k) or 403(b) plan, you can contribute to both the 457 and the other plan. Moreover, you can
invest up to the maximum in each account. In
2016, the limits are $18,000 in each type of account, plus catch-up
contributions – so you could make a total retirement contribution of as much as
$36,000 (or $48,000 if you are 50 or older). Investing the max in both is
a terrific option if you’re getting started saving a little late, or you just
want to maximize the advantages of these plans (tax breaks and matching, if


Even if you’re not eligible for another plan,
special 457(b) has additional catch up provisions in for workers three years
from the retirement age (as specified by their plan) to stash an additional
$36,000 if you haven’t maxed out your retirement savings in previous years.



What is
Thrift savings plan?


The Thrift Savings Plan, or TSP, is a kind of defined contribution retirement plan for employees of the federal government,
including members of the uniformed services (Army, Navy, Air Force, Marine
Corps, Coast Guard, Public Health Service, and the National Oceanic and
Atmospheric Administration, including the Ready Reserve or National Guard of
those services.)


They work much the same way as 401(k) plans: you can
opt to divert part of your salary into the plan, and the money is automatically
deducted from your paycheck before taxes are taken out. The money grows
tax-deferred until it’s withdrawn, and then Uncle Sam comes calling.


How much
can I contribute to thrift savings plan?


You can
contribute a maximum of $18,000 in 2016 if you are younger than 50 years old.
If you are 50 or older, you can make an additional catch-up contribution of as
much as $6,000, for a total of up to $24,000. Those contribution limits are
scheduled to adjust annually in line with inflation.


Advantages of defined contribution plan

The defined contribution plan
has become the retirement plan of choice for many businesses and
individuals instead of the defined benefit plan. With this type of plan, you
decide how much you want to contribute instead of how much you will receive at
the end.

Here are a
few of the advantages of using this type of retirement plan.


One of the biggest advantages of
using a defined contribution plan is that you have more control over the
process. You can decide how much you want to set aside for your retirement and
you can also make decisions about the investments. With this type of plan, you
get to choose what types of investments you put your money into. You decide
when to buy and sell shares and how risky you want to be. With a defined
benefit plan, you do not have any control over what happens to your money. A
pension manager will be in charge of the funds and they will choose the
investments for everyone.


Another advantage of putting
money into this type of retirement plan is that it is portable. This means that
you can easily take the money with you when you move to another company or
become self-employed. For example, if you have money in a 401k with your
employer, you can simply roll the money into an IRA when you quit your job. If
you start up with another employer that has a 401k, you can easily roll the
funds into that account and continue saving for retirement. This makes it a
much simpler process than when you are a part of a defined benefit plan.

3. Equal

With a defined contribution plan,
you will also be able to get benefits that are equal for everyone. With a
defined benefit plan, this may not be the case. Many defined benefit plans only
provide any type of benefit for those that have been employed at the company
for 10 years or longer. The vesting requirements of a defined benefit plan are
generally much more difficult than those of a defined contribution plan. With a
defined contribution plan, you will be able to gain access to the benefits much
sooner. As soon as you are eligible to start contributing to the plan, you can
start saving for your retirement.

4. Higher

With a defined contribution plan,
you can potentially have more money available for you during retirement. When
you put money into a defined contribution plan, you can choose the investments
for yourself and if they perform well, you will be rewarded. With a defined
benefit plan, you have a ceiling on what you can get for retirement. Everyone
receives a certain amount of money for a certain number of years of service for
the company. If the retirement benefits are not that high, it can be
disheartening because you know exactly how much you are going to get upon