- An investment plan for retirement is designed not only to protect wealth but to grow the value of assets in a fund. In an employer-sponsored plan, both the employer and the employee often make cash contributions to the plan to keep the funding level of the plan healthy. In an individual plan, it's up to the investor to make contributions. Investments such as stocks and bonds should be selected based on the amount of risk that can be tolerated and the type of returns needed.
- A defined benefit retirement plan is a pension fund that is sponsored by an employer, also known as a plan sponsor. In this type, the plan sponsor takes on the majority of the risk, not the employee. This is because it is up to the plan sponsor to make investment selections on employees' behalf. Investment decisions are made by an investment committee and sometimes an outside consultant. A percentage of total plan assets is devoted to asset classes, including stocks and bonds.
- A defined contribution plan, such as a 401k plan, is another type of employer-sponsored plan. A plan administrator typically is hired, and this financial institution either has money management capabilities, has relationships with other money management firms, or both. Investment options are determined based on the type of asset classes the retirement fund wants to offer its employees. Each employee has the final say in which funds will be selected based on the mutual fund lineup provided by the administrator.
- An individual retirement account (IRA) is opened by an individual at investment firms or financial institutions that offer IRAs. Benefits include tax advantages for making yearly cash contributions. According to Sallie Mae cited in Investment News, nearly one-quarter of people saving for college use an IRA as the savings mechanism. Retirement and a college education are separate milestones, however, and they require different investment techniques to be successful. A 10 percent withdrawal penalty is waived when the funds are used for education.
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