What feature of a deferred compensation plan often aids in providing retirement income?

A deferred compensation plan is structured to allow employees to set aside a portion of their earnings to receive at a later date, typically during retirement. A significant feature of this type of plan is tax deferral, which means that the income set aside in the plan is not subject to income tax until it is distributed.

This tax deferral provides a strategic advantage, as it allows the funds to grow larger over time due to the compounding of investment returns without the immediate tax burden. When participants eventually withdraw these funds during retirement, they may find themselves in a lower tax bracket, leading to potential tax savings. This mechanism enhances the sustainability of income during retirement, making it a valuable aspect of retirement planning.

While employer contributions can be part of a deferred compensation plan, they are not a universal feature and do not necessarily aid in providing retirement income if employees do not benefit from tax deferral. Stakeholder involvement and fixed returns, though relevant in some contexts, do not encapsulate the primary mechanism through which deferred compensation plans support retirement income effectively.