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Major Types of Employer Retirement Plans


The first step to understanding your retirement benefits is to understand your employer’s plan. There are two major types: defined benefit and defined contribution.

A defined benefit plan promises a specified payment amount at retirement. This may be stated as an exact dollar amount or may be calculated through a formula that includes factors such as your salary, age and time with the company.

In a defined contribution plan, you and/or your employer contribute to an account. Your contributions are invested and the value of your account upon retirement depends on the amount contributed and how your investments perform.

 

DEFINED BENEFIT PLAN

DEFINED CONTRIBUTION PLAN

Employer Contributions and/or Matching Contributions

 

Employer funded. Federal rules set amounts that employers must contribute to plans. There are penalties for failing to meet these requirements. 

For most plans, there is no requirement that the employer contribute. The employer may match a portion of the employee’s contributions or contribute without employee contributions.

Employee Contributions

Generally, employees do not contribute to these plans.

Many plans require the employee to contribute.

Managing the Investment

 

Plan sponsor manages the investment and is responsible for ensuring contributions plus investment earnings will equal the promised benefit.

The employee often is responsible for managing the investment of his or her account, choosing from investment options offered by the plan.

Amount of Benefits Paid Upon Retirement

 

A promised benefit is based on a formula in the plan, often using the employee’s age, years worked for the employer and/or salary.

The benefit depends on contributions made by the employee and the employer, performance of the account’s investments and fees charged to the account.

Type of Retirement Benefit Payments

 

Traditionally, these plans pay monthly annuity payments that continue for life. Plans may offer other payment options. 

The retiree may transfer the balance into an individual retirement account (IRA) or may receive it as a lump sum. Some plans offer payments through an annuity.

Guarantee of Benefits

The Federal government guarantees some amount of benefits.

No Federal guarantee of benefits.

Leaving the Company Before Retirement Age

 

If an employee leaves after vesting in a benefit but before the plan’s retirement age, the benefit generally stays with the plan until the employee retires.

The employee may transfer the account balance to an IRA or, in some cases, another employer plan. The employee also may take the balance out of the plan, but will owe taxes and possibly penalties.


If you have any questions about retirement plan services, or would like to begin talking to a retirement plan advisor, please get in touch by email or by calling (800) 388-1963.

Article adapted from the Department of Labor’s publication “What You Should Know About Your Retirement Plan.” 

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