Question

In general, no longer do Social Security benefits and employee pension plan benefits cover enough of the typical retiree’s expenses. More and more firms are discontinuing previous commitments to providing generous pension plans to employees. Two major types of employee retirement plans are a defined benefit plan and a defined contribution plan.

Respond to the following in a minimum of 175 words:

• Discuss advantages and disadvantages of both retirement plans: defined benefit and a defined contribution.
• If you were allowed to only select one plan for your retirement among the above two retirement plans, which would it be and why?

Answer 1

Advantages of defined contribution plan

In a defined contribution strategy, the employer can designate a specific amount to contribute to a special account allocated for each qualified employee. These funds are tax-deferred, meaning that the employer has the benefit of a tax shelter, while the employee pays tax once they are distributed.

In short, the company sets aside a certain amount of money each year to benefit the employee. This is often a percentage figure. Ultimately, there is no way to know how much will be contributed to the employee at the time of retirement. While the amount contributed remains fixed, the actual benefit amount is not set.

Upon entering into any type of retirement or benefit agreement, the employee should have details about the percentage of contribution being made and information on plan governance. There are restrictions within the agreement describing how and when funds can be withdrawn without penalty by the employee. The same goes for defined contributions for the purposes of health care: employees may be required to document their use of these funds by providing receipts for expenditures at the end of the plan year.

As a result of this, actuarial risk and investment risk fall in substance on the employee..

Advantages of Defined Benefit Plan

Defined Benefit Plan is an Employer-sponsored retirement plan where employee benefits are computed using a formula. The formula may differ from company to company. However, generally, it includes employment tenure and salary. The important part in defining the benefit plan is you would know what amount of funds would be deducted toward pension reserve and how much pension per month you would get on retirement.

• The employee would know its retirement amount in advance (from the day it signs the DBP contact).
• Benefits are indifferent to stock market risk/fluctuations or increase/decrease in bond yield.
• Comparing with DCP, the Defined Benefit Plan generates a higher return on investments which would include premature/ accidental death benefits to family members.

By considering both the options I would prefer DCB because it is more cost effective and fully coverup with insurance and more tax benefits....