I am a new employee and I was wondering if someone can help me understand what this defined contribution retirement plan means for me.

My org says after 1 year of service with 1000 hours and being 21 I can participate in the defined contribution retirement plan. The contribution schedule at first is:

  • 0-5 years of vesting service = 3.5%
  • 6-10 years of vesting = 4.5
  • 11+ = 6%

Then for the 403b retirement it says after 2 years of employment 500 hours and age 21 I am eligible for that. It says 50% of the first 3% employee contribution (1.5%). I'm 100% vested after 2 years 500 hours.

What is the defined contribution? I currently am funding my retirement Roth 403b and contributing 15%.

  • 1
    You might want to be slightly more verbose. I assume your last paragraph means you're funding a Roth IRA ? – xyious Jun 14 '18 at 19:35
  • Shouldn't evaluating and understanding the compensation you'll receive come before you accept the job? – DJohnM Jun 16 '18 at 3:36

A defined contribution plan is simply an employee-sponsored retirement plan where you and/or your employer can specify the contribution amount, and the benefit (what you get when you retire) is not defined (i.e., it's based on market returns and whatever you want to take out). A 401(k) and a 403(b) are kinds of defined contribution plans.

This is as opposed to a defined benefit plan, such as a pension, where you are given a particular benefit (such as, "$500 a month for life once you turn 65").

In your case, it's possible that your employer has two different options for a defined contribution plan. One that the employer self-funds, and one that the employer matches your contributions. That's uncommon, but particularly in companies with very many young employees is not that rare; in fact, my company has a contribution plan where it contributes the entire amount and doesn't require us to contribute anything (but we still can, just with no match).

So it sounds like you get 3.5% of your salary until you're with the company 5 years put into a 403(b) type plan, then higher amounts after that, plus whatever you contribute matched up to 3% (so 1.5%). So if you fully participated and contributed 3%, you'd get an additional 5% for years 3-5, an additional 6% for years 6-10, and an additional 7.5% from years 11+.

  • So if I am getting this right. Say I am annually contributing 15% to my plan. Year 1: will be: just my 15%. Year 2 will be 18.5%, year 3 will be 20%? year 7: 21% I am getting these numbers by adding the them to the 15%? – MountaindewKing Jun 14 '18 at 21:16
  • I think year 1 will be 16.5%, year 2-5 will be 20%, year 6-10 will be 21%, and year 11+ will be 22.5%. You're getting the 1.5% the whole time; vested in that sense means that you'd have to stay employed for the 2 year period to keep that 1.5% after you leave. So as long as you stay 2+ years/500+ hours/whatever the rules are, you get that 1.5% the whole time. – Joe Jun 14 '18 at 21:33
  • "My org says after 1 year of service with 1000 hours and being 21 I can participate in the defined contribution retirement plan." But since I don't have 1 year of service yet I only get the 15% that I am contributing since right now I have not been there a year? Correct? – MountaindewKing Jun 14 '18 at 21:57
  • Oh, I may have misread the other part. You may have it right. – Joe Jun 14 '18 at 21:58

Contribution is what you're putting into your 401(k) from your paycheck. You spend 3% of every paycheck and your company pays an additional 50% of that into your 401(k)

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