Long Term Partners
PENSION PLANS Linked from US Dept. of Labor
A defined benefit plan promises a specified monthly benefit at retirement. The plan may state this promised benefit as an exact dollar amount, such as $100 per month at retirement. Or, more commonly, it may calculate a benefit through a plan formula that considers such factors as salary and service — for example, 1 percent of average salary for the last 5 years of employment for every year of service with an employer. The benefits in most traditional defined benefit plans are protected, within certain limitations, by federal insurance provided through the Pension Benefit Guaranty Corporation (PBGC).
A defined contribution plan, on the other hand, does not promise a specific amount of benefits at retirement. In these plans, the employee or the employer (or both) contribute to the employee's individual account under the plan, sometimes at a set rate, such as 5 percent of earnings annually. These contributions generally are invested on the employee's behalf. The employee will ultimately receive the balance in their account, which is based on contributions plus or minus investment gains or losses. The value of the account will fluctuate due to the changes in the value of the investments. Examples of defined contribution plans include 401(k) plans, 403(b) plans, employee stock ownership plans, and profit-sharing plans.
How does this affect you the investor.
A defined contribution plan does not put the onus on the company while a defined benefit plan does.
Safety
The Pension Benefit Guaranty Corporation (PBGC), a government agency, protects and insures pensions. If your plan doesn't have enough money to pay your benefits, the PBGC will pay the benefits up to a certain point. You may not get the full pension that you expected. Pension Benefit Guaranty Corporation (PBGC)Join Long Term Partners mailing List
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