Defined Benefit Plan
A retirement plan that defines and guarantees a specific pension amount to the employee. The benefit is determined according to a formula based on years of service, average salary, and a multiplier. Employer and employee contributions are pooled and invested by professional money managers. Both investment and demographic risks are shared by all plan participants. Once the retirement age and service rules are met (age 62 and service of five years) the retiree is eligible for a lifetime annuity based on the pension formula.
Defined Contribution Plan
A retirement plan in which an employer guarantees a specific contribution, typically a percentage of wages, to individual employee accounts. Investment and demographic risks are borne by each individual participant. Contributions are typically made annually, and employees can invest the contributions in a number of investments approved by plan trustees. The retirement benefit is determined solely by the account balance.
|
