Question

Why are 401(k) (and the related 403(b)) plans increasing in number while traditional defined benefit plans are not? How do the questions of commitment to future income and financial risks in the plan relate to these changes? For which type of plan (defined benefit or defined contribution) does PBGC play a role? What is the status/outlook of PBGC?

Answer 1

Employer sponsor retirement plans are divided into two major categories: defined benefit plan or traditional pension plan and defined contribution plan I. e. 401(k)

Traditional plan provides a specified payment amount in retirement.

Plans 401(k) allows employer and employees to contribute and invest funds over time to save for retirement.

In traditional plan provides eligible employees guaranteed income for life when they retire. Amount for each participant that is based on factors such as employees's salary and years of service.

Employer has a full control over the fund and in case of risk he will bear the risk so, investment is in controlled way and return on investment will not cover the defined- benefit due to retired employee. Due to this risk , this traditional method is not so famous in private sector .

Plan 401(k) has placed the burden of saving and investing for retirement on employee. It is funded primarily by employee and many employers make matching contribution to a certain amount.

Employees can elect a portion of their gross salary and the company may match the contribution if it chooses, upto a limit sets.

Due to this changes, workers plan today to ensure they will have sufficient funds after they have completed working and are ready to enjoy a well- deserved retirement from the workforce.

The most obvious advantage for taxpayers of a defined contribution plan and it eliminates investment risk for them.

The PBGC insures private pension beneficiaries against the complete loss of accured benefits if their defined benefit pension plan is terminated without adequate funding. The PBGC receives no appropriations from general revenue. It's operation are financed by insurance premium