Lessons from across the pond:
Defined contribution retirement plans in the US and the UK
By Francois Barker, Adam Cohen, Brittany Edwards-Franklin and Tim Smith
In the US, the most prominent type of employer-sponsored
defined contribution plan is a 401(k) plan, named after the tax
code section that provides the plan’s tax-deferred nature. A
401(k) plan is based on employee contributions and employer
matching and profit-sharing contributions that are generally
tax-deferred upon contribution and invested in accounts over
which the employee has investment control. Unfunded
supplemental plans, sometimes referred to as top-hat plans,
are permitted for executives and other highly paid employees.
This article focuses on 401(k) plans, but certain types of
employers can sponsor other defined contribution plans.
In the UK, the most common forms of employer-sponsored
defined contribution plans are occupational defined
contribution pension plans, group personal pension plans,
and master trusts. Like in the US, amounts held in these plans
are tax-favored, the plans are funded through employee and
employer contributions, and employees generally have an array
of investment options from which they can choose. In order
to benefit from favorable tax treatment, a plan must be a
“registered pension scheme” meeting certain requirements.
Employers also may operate unregistered schemes to enhance
the benefits provided to senior executives.
The 401(k) plan, also known as a “defined contribution” or “DC” plan, is now firmly entrenched as the primary
employer-based retirement vehicle in the US. Defined contribution plans have likewise become the primary
workplace pension vehicle in the UK. As a result, participation, investments, and distributions have become
key concerns for employers, employees and policymakers on both sides of the Atlantic. As the search for
new and innovative solutions takes on increasing importance, it is helpful to reflect on the ways in which
workplace defined contribution retirement plans have evolved in the US and the UK and to learn from
examples of best practices in each jurisdiction.