Would you rather have had a DB or a DC in the summer of 2008? Explain.

Expert Solution

A defined benefit (DB) pension plan is one where the annual pension amount is calculated based on some factors such as years of work, salary history, age etc. The pension benefit to be received in retirement is defined and calculated before the retirement itself. Hence, there is certainty regarding the amount of pension during retirement.

In a defined contribution (DC) plan, the contributions to the pension plan are made by the employee/employer. However the benefits to be received in retirement are uncertain. This is because the pension sponsor (company / employer) is not responsible for any obligation regarding the pension benefits. It is different from a DB plan where the sponsor is responsible for the pension benefit payments. In a DC plan, the employee has to decide where to invest the contributions.

In summer 2008, I would rather have had a DB plan. This is because the markets crashed in 2008. If I had a DC plan, I would have been impacted negatively as my pension income or pension fund would have deteriorated. If I had had a DB plan, the plan sponsor would have been obligated to pay the pension benefits, irrespective of the condition of the markets

jeff jeffy answered 10 months ago

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