In an attempt to attract and retain good employees, companies may offer the benefit of retirement savings options. Employers have the option of sponsoring defined benefit plans and defined contribution plans or both to eligible employees. The intent of the plans are to provide long term investment options to be used as retirement income. Each investment option has its own pro’s and con’s to both the employer and employee. The following information provided will compare and contrast defined benefit plans and defined contribution plans. It will also discuss how beneficial the plans may be for participants. Defined Benefits and Defined Contribution Retirement Plans Compared Defined benefit and defined contribution are two types of retirement plans that companies offer their employees. The two benefits are different based on how employees are able to participate, but both plans serve the same purpose.
Defined benefit plans is a fixed amount set up for eligible employees for retirement. This plan consists of employer contributions either quarterly or annually. It is an actual determination of what the employee retirement benefits should be and not based on profits. A dollars time’s service calculation is usually used in large organization. The defined benefit contribution plan is based on employee contributions and employer contributions. With these plans the employer agrees to contribute a fixed amount to the employee’s pension fund each year. The income that the employee receives during retirement depends upon how much money the plan accumulated and how much income that amount can generate. The 401k and stock plans are offered by many employers. “When the markets rise, the employer will reap the benefit of the rising values, and can reduce its pension contributions and increase its profits while the retiree continues to receive the same promised income” (401kpsp.com, 2011).
Defined Benefits and Defined Benefit Contribution Plans in Contrast In order to determine the contrast or difference between a defined benefits plan, and a defined benefit contribution plan we first determined how these plans work in the prior section. Now that we understand what each plan is, the difference is clear. If a retiree is receiving the defined benefits plan then they will enjoy a plan that is funded by the company. The amount is based off of a percentage of the participant’s pre-retirement pay, and the employee’s length of service on the job.
Many soldiers retire and it is based off their rank and time in service. They can also receive disability pay that is figured into their retirement. Whereas, the defined contributions plan has annual contributions made by both the employer; and the employee to the retirement fund. Therefore, one benefit is supported 100% by the employer and the other plan is a shared responsibility between the employee and the employer, such as 401k plans. Although both plans are for retirement, they work in different ways. However the ultimate purpose of both plans is to put in place a means of support to the employee during their retirement years.
In conclusion, both defined benefit and defined contribution retirement plans have some similarities and differences. The similarities in both plans are that it helps employees plan for their retirement. Both plans have the intent to help save money for this special event. The difference for the retirement plan is how it is offered and put together. The defined benefits retirement plan uses a fixed rate of contribution by the employer to the employee’s retirement plan. This is usually combined by using the employees time in service and pre-retirement pay. The defined contribution plan is based on the contribution of the employee’s pay which is then matched by the employers.
In this plan, the contributors to the retirement plan are both the employee and the employer and this proves the difference between the defined benefit and defined contribution retirement plans. Both these plans are used to help with providing retirement income for the employees. Together with this the employees are given the decisions on various options for retirement. They may choose one or both dependent on the employer’s policies. Ultimately these retirements plan are very beneficial for the employees when they reach their retirement due to the provided income support.
Defined Benefits vs Defined Contribution Benefits. (2011). Retrieved from
http://401kpsp.com/401kdbdc.php Martocchio, J. J. (2009). Strategic compensation: A human resource management approach(5th ed.). Upper Saddle River, NJ: Pearson Education.