What Is an Individual Account Plan?

John Lister

An individual account plan is a specific type of retirement savings account. It is usually offered by an employer or union for multiple employees, but keeps the contributions, investments and benefits for each member completely separate for administrative purposes. It may also be known as a money purchase plan.

Individual account plans are retirement programs offered by an employer or union.
Individual account plans are retirement programs offered by an employer or union.

In most cases, the money that goes into an individual account plan comes from a combination of money paid by the employee, and money provided by the employer. Usually the employee's contribution is deducted from his salary before it is paid, which can have tax advantages. Some companies will also put money into the plan to compensate the employee for any unused vacation time at the end of the year.

In many cases the amount paid in by the employer is fixed at a percentage of the employee's salary. In some cases, the amount paid in by the employer may be based on company profits for the relevant financial year. This is designed to give employees incentive to work harder and help the company achieve better results. There is some debate about whether this tactic works, particularly among staff who are not in executive or management positions and have little personal influence over the overall success of the business.

The individual account plan works on a defined contribution basis. This means the amount of money put into the plan is fixed, but the amount of benefits the holder eventually gets paid depends on how successfully the contributions are invested. This is in contrast to a defined benefit plan where the employer guarantees to pay a certain level of benefits, usually based on the employee's salary at or near retirement. Employers usually prefer defined contribution plans as this does not leave them at risk of not making enough money from investments to pay the guaranteed benefits.

As well as being a generic term, Individual Account Plan is also the name of a specific plan offered by several unions in the US movie industry, where many workers do not work a regular schedule. As part of an agreement between employers and the unions, employers pay in an amount that takes into account the minimum scale applicable to the worker's position and the actual amount of work the employer does. Unlike some retirement plans, the movie industry Individual Account Plan can make the worker eligible for a payout upon retirement age even if she has only worked for the relevant employer for a single year.

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