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Completion Time:  20 min
Basics of Alternative Retirement Plans

Defined Contribution Plans

In a defined contribution plan (DC), you and your employer each contribute a predetermined, or “defined,” amount to your individual account, which is then invested in one of several professionally designed and managed funds. These accounts allow you to choose whether to convert retirement savings from your working years into a lump-sum, a guaranteed monthly pension check (called an annuity), or a combination of both.

These plans—known by a range of technical names such as 401k, 401a, 403b or 457 plans—provide an individual account where you can choose the investment strategy for all contributions made by you and your employer. You can select an investment strategy based on your own risk tolerance and retirement goals, but you typically do not manage the investments yourself.

The early 401(k) plans in the 20th century required people to figure out their own portfolios—a very difficult undertaking. Today, the most common approach in the private sector is to use pre-designed retirement funds from groups like Vanguard, Fidelity, Northwest Mutual, Lincoln Financial, TIAA, etc.

A good defined contribution plan will automatically enroll participants into a professionally managed investment fund with low fees, as well as more risk early in an individual’s career and less risk near the end. That means that teachers with DC plans don’t have to make investment choices for themselves if they don’t want to or don’t feel equipped, and they won’t get shoved into a risky investment program with high fees. A retirement system’s administrators can protect its members by working directly with financial companies to make sure teachers don’t get taken advantage of. That is exactly what Michigan, Utah, Florida, and other public-sector DC plans do for their teachers.

Defined contribution plans also allow you the flexibility to change your own contribution as your finances allow, but without a guarantee of any specific investment return on additional contributions.

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