The retirement industry is full of challenges, both for participants and administrators. Understanding the difference between commonly used terms is a task that even retirement professionals need a helping hand with. Terms such as Recordkeeping and Plan Administration can mean different services depending on the location, size, and more of a clients workforce and retirement plan needs.
If you have ever wondered what the difference between a Defined Benefit (DB) and Defined Contribution (DC) Plan is, this blog post has your back.
Defined Benefit Plan
A defined benefit plan promises to pay a specified benefit at a future retirement age. Rather than stating the amount of money that an employee will put into an individual account, these plans define the amount of retirement benefit to be paid to the employee by their employer at a future date. The actual level of benefit is calculated using a formula stated in the plan document, the legal document that defines how the plan will be operated. The benefit is usually payable at a specified future time, such as attainment of age 65. Some retirement plans also provide benefits upon the disability or death of the participant before retirement.
Defined Contribution Plan
A defined contribution plan is sometimes known as an individual account plan because a separate account is maintained for each individual participant. These types of plans define the contribution amount to be deposited into the participant’s account by an employee and also their employer who pays a company match or profit share contribution. For example, a plan may provide that every eligible participant will receive an allocation, or share of the total company contribution.
This chart will help you compare and contrast these two plans:
|Defined Contribution Plans||Defined Benefit Plans|
|Individual participant accounts||Pooled Plan account|
|Defined contribution amount||Defined benefit amount|
|Retirement benefit equals accumulated value of account on a daily basis||Retirement benefit equals the promised benefit|
|Participant bears the investment risk||Employer bears the investment risk|
|Benefits are not guaranteed||Pension Benefit Guaranty Corporation (PBGC) guarantees a portion of the benefit for covered plans|
|Preferred by younger employees||Preferred by older employees|
|Investment results generally have no effect on employer-made contributions||Investment results increase or decrease employer contributions|
Staying up to date with news and industry terminology is key in order to witness success in your plan.
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