Question

1. How does defined benefit plans encourage retirement? Explain with an example

Answer 1

The defined benefit plan is retirement program that is sponsored by the employer under which the employee tends to be guaranteed an assured benefit which is dependent on his/her length of service and compensation history. It can also be said to be qualified pension plan and is essentially referred to us as benefit plan because the employer together with the employee know and understand the formula to work out the benefits that a head of the post retirement period.. When offered such schemes, employees do benefit in terms of attractive compensations packages together with an opportunity to realize both pros and cons of the scheme. For example, an employee can approximate well the compensation package and then plan to invest in better yielding investment scheme. Additionally, the income that is generated from such plan assets are not subjected to tax since the scheme is covered under the Employment Retirement Security Act of the 1974 altogether with the revenue code thereby making it qualify for the significant tax advantages.

Explanation:

Reference: Friedberg, L., & Webb, A. (2005). Retirement and the evolution of pension structure. Journal of Human Resources, 40(2), 281-308.