Contributory plan definition
/What is a Contributory Plan?
A contributory plan is a retirement plan that requires current employees or retirees to pay for a portion of the plan cost. Any amounts paid by employees are taken directly from their paychecks. Depending on the terms of the plan, these contributions may trigger increased benefit payments. Most retirement plans are contributory plans.
Example of a Contributory Plan
An example of a contributory plan is a 401(k) retirement plan offered by many employers in the United States. Under this plan, employees contribute a portion of their salary to a tax-advantaged retirement account, often through automatic payroll deductions. Many employers also offer matching contributions, where they contribute a percentage of the employee’s contributions up to a certain limit. For example, if an employee contributes 5% of their salary, the employer might match 3%, helping the employee grow their retirement savings. Since employees actively contribute to the plan, it qualifies as a contributory retirement plan.
Advantages of Contributory Plans
There are several advantages to offering contributory plans to employees, which are as follows:
Enhanced benefits. Employees eventually receive the contributions made by the employer, which improves their retirement benefits. This can convince them to continue working for the employer for an extended period of time, in anticipation of receiving the benefits.
Enhanced participation. Employees are also contributing to these plans, so they have a greater interest in how well the plan is managed, as well as the expenses being incurred by it and the rate of return on investment being generated.
Talent recruitment. The employer can use a well-funded contributory plan to attract talented employees and retain them for an extended period of time.