Employers have become less generous than they had been in the past with pension benefits. Corporate restructurings have left many people working for smaller businesses which usually don't offer generous pensions. Many big established companies have changed from, or rely less on, the more costly defined-benefit plans. Instead, many companies now use the less expensive and more flexible defined-contribution plans.

Defined contribution plans are actually a broad range of programs including profit-sharing plans, money-purchase plans, 401(k) plans, employee stock ownership (ESOP) plans and others. Either you alone, or you and your employer make contributions into the plan, usually based on a percentage of your annual earnings. Each participant has an individual, separate account. There is no way to determine in advance what the final payout at retirement will be. Your benefits depend on how much was contributed in your name and how well the pension fund investments performed. So, the risk of fluctuations in investment return is shifted to the employees. The government sets a limit on how much can be contributed in your name each year no matter how many different plans you participate in. The total amount that can be contributed in one employee's name for 2008 is the lesser of $46,000 ($45,000 for 2007) or 100 percent of the employee's annual earnings. The contributions are allocated to separate accounts for each participant based on a definite, predetermined formula. Forfeitures can be reallocated to remaining participants.

• Profit-sharing plans: profit-sharing plans are a very popular type of plan, especially for small businesses. They offer the greatest flexibility in contributions and are simple to administer. Initially developed to encourage hard work and loyalty, the plans encourage companies to set aside money in the employees' names when the company shows a profit. Generally, the employer has the discretion to contribute up to the lesser of 25 percent of compensation for each plan participant or $46,000 for 2008 ($45,000 for 2007; this amount may be adjusted for inflation). For the employer, however, the applicable percentage limit is lower at 20 percent of your net earnings. The employer may decide not to contribute in any given year, if it so desires.
• Money-purchase plans: in the money-purchase plans, the employer is obligated to contribute even if the company didn't make a profit. The contributions are determined by a specific percentage of each employee's compensation and must be made annually.
• 401(k) plans: many qualified defined-contribution plans permit participating employees to make contributions to a plan on a before-tax basis. These plans are called cash or deferred arrangements or CODAs (or, more popularly, a 401(k) plan, named after the Internal Revenue Code provision dealing with CODAs). They enable participants to save for retirement on a before-tax basis. The employees authorize their employer to reduce their salary and contribute the salary reduction on their behalf to a qualified retirement plan. In addition to these employee elective deferrals, an employer can make supplemental contributions on behalf of employees. These employer contributions can be subject to a vesting schedule, but the employees' contributions must be nonforfeitable. The employee's elective deferral to all 401(k) plans is limited to $15,500 for 2007 and 2008 (this amount may be adjusted for inflation). Those who are age 50 and over in 2007 and 2008, can contribute an additional $5,000 for the year. The employer contribution is also subject to separate, complex limitations. Generally, withdrawals from 401(k) plans are not permitted before age 59¹/₂ unless the employee retires, dies, becomes disabled, changes jobs, is a reservist called or ordered to active military duty for more than 179 days, or suffers a financial hardship as defined by Internal Revenue Service regulations. 401(k) plans are often offered in combination with other plans, such as profit-sharing plans.
• Employee Stock Ownership Plans (ESOP): an ESOP is a stock bonus plan or a combination stock bonus plan and money purchase plan that is designed to invest primarily in qualifying employer securities and to use borrowed funds to do so. An ESOP is funded by employer contributions of stock in the corporation or allows you to buy shares of stock as a plan investment option. ESOPs must comply with all the requirements imposed on other types of defined-contributions plans. ESOPs cannot be integrated with social security.

Other examples of defined contribution plans for small businesses to consider include:

• SIMPLE plans
• SEPs (simplified employee pensions)
• SARSEPs (salary reduction simplified employee pensions: these plans may no longer be started, but an existing SARSEP plan may be continued)