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lly if the company does well their plan will do well. This is seen as a positive situation as the employees are not charged any transaction costs so they are able to build up a large amount of shares over the course of their career. Also the companies contributions are tax deferred to a certain point so they also benefit. The deductibility of contributions to an ESOP becomes even more attractive when they choose to use a leveraged ESOP. Under this arrangement, an ESOP takes out a cash loan from a bank or other lender, with the borrowed funds being paid to the sponsoring employer in exchange for employer securities. Since contributions to a tax-qualified employee benefit plan are tax deductible, the employer may deduct contributions to the ESOP which are used to repay the interest and principal on the loan. This makes the ESOP an attractive form of debt financing for the employer from a cash flow perspective.

There is also a Defined Benefit Plan. This is a plan where you receive a specific amount each month when you retire. This number is figured out by a formula that takes into affect salary, tenure of service and age. This is a nice plan because there are not too many surprises when it comes to the amount that you will receive each month. The liability of the pension lies with the employer who is responsible for making the decisions. Employer contributions to a defined benefit pension plan are based on a formula that calculates the investments needed to meet the defined benefit. These contributions are determined by taking into consideration the employee's life expectancy and normal retirement age, possible changes to interest rates, annual retirement benefit amount, and the potential for employee turnover.

For many of the retirement accounts they leave it up for the investor to either choose the allocation of their funds or they funds themselves. Some of the choices will be common stock, bonds, commodities, mutual funds, exchange traded funds, and real assets. The choice of these investments depends on your time horizon to retirement and your risk tolerance. In general if you are 10 or more years from retirement you should be leaning towards more of the growth side of the spectrum and be invested in mostly common stock or mutual funds. Once you get closer and closer to your retirement age you need to begin relocating your plan assets into more income based investments like bonds and cash. There should never be a complete allocation in either direction as you need to be diversified to hedge risk. Also when your retirement year is greater than 10 years away it is important to realize that it is a long term investment, and you should not to be too worried about the short term highs and lows.

Taking a look back on the average returns on these different types of investments can also be beneficial. If you look at the average return of the S&P 500 from 1960-2010 there is an annualized return of 11% (YahooFinance). This lets you know that over the long run if you invested your money into stocks you would have an average annual return of 11%. Of course this is based on the overall average return of the whole stock market, and with risky securities like stocks, there is a good sized deviation from this average. When you look at the average annual return of mutual funds, it is estimated at a 9% annual return since their existence (Vangaurd). The average annual return on U.S. Treasury Bonds is 4.9%,