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Money purchase plans, are they the right retirement choice? Discover their value and whether they fit your financial future.

Money Purchase Plans: Are They Worth It?

Disclaimer: This website and its content are for informational purposes only and is not financial advice.

Understanding the Money Purchase Plan

Saving for retirement is a vital part of financial planning, and for many businesses and their employees, understanding the various options available is the first step toward a secure future.

Among the landscape of employer-sponsored retirement plans, the money purchase plan stands out with its unique characteristics. This type of plan, a form of defined contribution plan, can offer distinct advantages, though it also comes with specific commitments.

A money purchase plan is fundamentally an employer-funded retirement arrangement. Unlike some other plans where contributions might fluctuate based on company profits, a money purchase plan requires the employer to make a fixed, annual contribution to each eligible employee's account.

This contribution is typically calculated as a set percentage of the employee's salary, and it's a mandatory commitment the employer makes, regardless of the business's profitability. This predictability in contributions is a cornerstone of the money purchase plan.

For employees, this means a consistent building block for their retirement savings, year after year, which can be a highly attractive component of their overall compensation package.

How a Money Purchase Plan Works

The structure of a money purchase plan dictates that the employer establishes a predetermined contribution rate within the plan document itself. This commitment ensures a steady flow of funds into employee accounts.

While the employer is responsible for these mandatory contributions, employees generally have the ability to direct how their funds are invested from a selection of options provided by the plan. The growth of these retirement savings then depends on the performance of those chosen investments, introducing an element of investment risk for the employee, much like other defined contribution plans.

One of the significant benefits of a money purchase plan for both employers and employees is the potential for substantial contributions. The Internal Revenue Service (IRS) sets annual limits on how much can be contributed to these plans.

For 2025, the maximum annual addition to a participant's account in a defined contribution plan, which includes a money purchase plan, is $70,000. This limit can allow for considerable retirement savings accumulation, especially when considering that employer contributions are tax-deductible for the business and grow tax-deferred within the plan for employees.

Considerations for Employers

However, the mandatory nature of the contributions in a money purchase plan also presents its primary distinction and potential challenge for employers. The fixed contribution rate means that even during lean financial years, the employer is still obligated to make the promised contributions. Failure to do so can result in penalties.

This lack of flexibility, when compared to a profit-sharing plan where contributions can be discretionary, requires careful financial planning and a stable cash flow from the employer's perspective. For businesses that value long-term planning and employee retention and possess the financial stability to support consistent contributions, a money purchase plan can be an excellent choice.

Updated Jun 2nd, 2025

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Money Purchase Plans vs Other Retirement Options

It's also worth noting how a money purchase plan compares to other common retirement vehicles, such as a 401(k). While both are defined contribution plans, a 401(k) primarily relies on employee elective salary deferrals, with employer contributions often being optional or matching.

In contrast, a money purchase plan's funding is predominantly driven by mandatory employer contributions. Sometimes, businesses might even combine a money purchase plan with a profit-sharing plan or a 401(k) to maximize contributions and offer a comprehensive retirement benefits package.

Key Takeaways

In summary, a money purchase plan offers a structured and predictable approach to retirement savings, driven by mandatory employer contributions. This consistency can be a powerful tool for attracting and retaining talent, providing employees with a clear and reliable path to building their retirement nest egg.

While the fixed commitment demands financial foresight from employers, the significant contribution limits and tax advantages can make a money purchase plan a valuable and worthwhile component of a robust employee benefits strategy.

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By Jordan McCaleb, Investment Researcher