Scribd Logo
Upload

Welcome to Scribd!

  • 63 views

    Defined-Contribution and Defined-Benefit Plans

    Uploaded by

    Tawanda B Matsokotere
    Defined-contribution plans are the most common type of pension plan in the US private sector because they place the investment risk on employees while costing employers less than 3% of payroll expenses compared to 5-6% for defined-benefit plans. Under defined-contribution plans, employers contribute a set amount to individual employee accounts based on factors like age and tenure, with benefits depending on contributions, investment returns, and forfeited funds from early employee terminations. Some plans encourage additional employee contributions by requiring employers to match a portion of employee contributions.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as DOCX, PDF, TXT or read online from Scribd

    Defined-Contribution and Defined-Benefit Plans

    Uploaded by

    Tawanda B Matsokotere
    63 views1 page
    Defined-contribution plans are the most common type of pension plan in the US private sector because they place the investment risk on employees while costing employers less than 3% of payroll expenses compared to 5-6% for defined-benefit plans. Under defined-contribution plans, employers contribute a set amount to individual employee accounts based on factors like age and tenure, with benefits depending on contributions, investment returns, and forfeited funds from early employee terminations. Some plans encourage additional employee contributions by requiring employers to match a portion of employee contributions.

    Original Title

    1

    Copyright

    © Attribution Non-Commercial (BY-NC)

    Available Formats

    DOCX, PDF, TXT or read online from Scribd

    Did you find this document useful?

    Is this content inappropriate?

    Defined-contribution plans are the most common type of pension plan in the US private sector because they place the investment risk on employees while costing employers less than 3% of payroll expenses compared to 5-6% for defined-benefit plans. Under defined-contribution plans, employers contribute a set amount to individual employee accounts based on factors like age and tenure, with benefits depending on contributions, investment returns, and forfeited funds from early employee terminations. Some plans encourage additional employee contributions by requiring employers to match a portion of employee contributions.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    63 views1 page

    Defined-Contribution and Defined-Benefit Plans

    Uploaded by

    Tawanda B Matsokotere
    Defined-contribution plans are the most common type of pension plan in the US private sector because they place the investment risk on employees while costing employers less than 3% of payroll expenses compared to 5-6% for defined-benefit plans. Under defined-contribution plans, employers contribute a set amount to individual employee accounts based on factors like age and tenure, with benefits depending on contributions, investment returns, and forfeited funds from early employee terminations. Some plans encourage additional employee contributions by requiring employers to match a portion of employee contributions.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    of 1

    1.

    Defined-contribution and defined-benefit plans

    There are two most common types of pension plans: defined-contribution and defined-benefit plans.
    Some companies use profit sharing pension plans and hybrid retirement plans as well (e.g. cash balance,
    target benefit plans). However, the majority of U.S. employers in the private sector prefer defined-
    contributions plans because:
     Under the defined-contribution plan investment risk is assumed by employees, and
     They cost a smaller percentage (e.g. less than 3%) of payroll expenses in comparison to defined-
    benefit plans (e.g. 5-6%).
    2. Explanation of defined-contribution plans
    Defined-contribution pension plans only define the amount of contribution the employer has to make to
    the plan. In other words, the employer must only contribute a certain amount to the plan each period. The
    amount of employer's contribution is based on a formula, which includes such factors as employee's age,
    years of service, salary levels, and employer's revenues. Define-contribution plans, however, do not
    specify nor make a promise about the benefits pension recipients (herein called employees), covered by
    the plan, will ultimately receive in the future. Instead, the employer hires an independent third-party
    trustee (i.e. pension trust) to manage the employer's contributions, to make investments, and to make
    distributions to the beneficiaries of the plan (i.e. employees). Important to note that the trust is an entity
    separate from the employer, and employees are the only "beneficiaries" of the trust; that is, both
    investment rewards (benefits) and risks (losses) are assumed by employees.

    The benefits an employee can receive under a defined-contribution plan depend on the following factors:
     The original amount of employer's contribution
     Income accumulated by the trust from its investments (e.g. in stocks, bonds)
     Forfeitures of funds due to the early terminations of some employees

    Some defined-contribution plans offer additional benefits to employees. For instance, under certain plans
    employers have to match a portion of the employee's contribution to the plan (i.e. employers have to
    contribute an additional amount that equals a certain percentage of the employee's contribution). In such
    a case, employees usually cannot withdraw their funds, without incurring a substantial penalty fee, until
    they reach a certain age (e.g. 59.5 years).

    You might also like