Question

Recent changes in how employees receive retirement, e.g. through a defined contribution plan vs. a defined benefit plan, have caused many to question whether they can retire at the age they expected. Please address responses to the following questions:

What is the main difference between the 401(k)-type, e.g. defined contribution plans, vs. traditional pension plans, e.g. defined benefit plans?

Which type of retirement plan do you prefer and why?

What type of retirement plan do you have at your place of employment?

Answer 1

Difference:

A defined benefit plan has a specific amount of pension or other monetary benefits for an employee after retirement. Therefore, the amount is fixed and guaranteed by the employer. Only the employer contributes whole amount of money in this fund.

On the other hand, a contribution plan doesn’t have such surety of fixed amount of benefit; here, the amount of current contribution (either employee or employer or both) is fixed and assured by the employer but how much the fund can accumulate in future is uncertain – generally long period of accumulation may give higher return; therefore, the benefit amount is not certain. The contributed fund may not have such return what expected.

Preference:

I always prefer defined benefit plan, because I became a participant on my higher age.

If participant’s age is very high (say 50 years or 55 years), the long period of accumulation is not possible because of approaching retirement age very soon. Therefore, it is better to have defined benefit plan where at least a certain amount is confirmed in future.

Type:

There is defined contribution plan in my work area. In this plan me and by boss used to contribute a fixed amount of money per month – what I contribute, my boss contributes the same as well.