What type of retirement plan involves setting aside part of a company's net income for employee distributions?

The profit-sharing plan is designed specifically to distribute a portion of a company's profits among its employees. In this type of retirement plan, the employer contributes a percentage of the company's net income to the plan, which is then allocated to employees' accounts based on a predetermined formula. This approach motivates employees by aligning their interests with the company's financial success, as the amount available for distribution can vary from year to year depending on the company’s profitability.

Defined benefit plans, in contrast, are based on a formula that typically considers an employee's salary and years of service, guaranteeing a specified payout upon retirement without direct ties to company profits. A 401(k) plan allows employees to make contributions from their salary and may include employer matching, but it does not directly involve setting aside a portion of net income. Pension plans, similar to defined benefit plans, promise a specific monthly benefit based on a formula upon retirement, rather than a share of profits generated by the company. Thus, the profit-sharing plan uniquely focuses on distributing a share of the company's earnings to employees as part of their retirement savings.