Additional Voluntary Contribution (AVC)

An additional voluntary contribution is an extra allocation of funds to a retirement savings account that is above the amount that an employer will provide as a matching contribution. An employee can make additional voluntary contributions at her or his own discretion. Employees can make additional contributions to tax-deferred savings accounts such as 401(k), 403(b) and SEP and SIMPLE IRAs (individual retirement accounts).

Additional voluntary contributions allow employees to contribute more money to their tax-deferred account. Employer-sponsored retirement plans typically indicate the percentage of the employee's salary that they will match towards retirement. Employees can make additional payments to increase the account's value and thereby increase the amount of money they will receive following retirement, due to compound interest. Additional voluntary contributions may vary in tax treatment, depending on the type of plan, but if they are made into a tax-deferred account, any returns accumulate tax-free until retirement.

As noted above, common retirement plan types that employers offer are a 401(k), 403(b) and individual retirement account (IRA). In companies, 401(k)s are highly prevalent. As of December 2017, there were 55 million active participants in 401(k) plans, holding $5.3 trillion in assets. Changes in 401(k) plans have increasingly benefited employees over the years, including the practice of additional voluntary contribution.

Today, the average 401(k) plan offers nearly two dozen different investment options, balancing risk and reward, according to the employees’ preferences. Contribution limits are indexed to inflation, which has allowed participants to make larger contributions to plans over time. At the same time, fund expenses and management fees have remained level and/or even declined, making this option more feasible for many employees.

The 403(b) plan is a specific retirement plan for employees of public schools, tax-exempt organizations, and certain ministers. While it has many of the same features as a 401(k), 403(b)s invest in either annuities or mutual funds.

SEP IRAs are established by employers, including self-employed individuals, such as consultants, independent contractors, sole proprietors, or partners for the benefit of their employees. Employers make discretionary contributions on behalf of eligible employees. Contributions are tax-deductible, provided they do not exceed the statutory limit. In addition, employees do not pay taxes on SEP plan contributions (simply on any plan distributions).

SIMPLE (Savings Incentive Match Plan for Employees) IRAs also allows both employers and employees to make contributions. The employer's contribution is mandatory, while the employee's contribution is optional.