There are many different options when it comes to funding your retirement. Some of those options are available through your workplace, while others you can save yourself. Deciding which plan is right for you can be stressful. Whether you go through your employer or set up your own plan, there are still a lot of options to consider and questions to ask yourself.
One of the plans that may be available through your employer is called a defined benefit plan. What is a defined benefit plan and how does it differ from other plans? Let’s look at how a defined benefit plan works and if it is the right plan for you.
Stay Compliant with our Fiduciary and Plan Sponsor Checklist
How does a Defined Benefit Plan Work?
A defined benefit plan is one of the retirement options that is funded by an employer. Sometimes a defined benefit plan can be called a pension plan or a qualified benefit plan. It is called a defined benefit plan because the formula that is used to calculate retirement benefits is determined at the creation of the plan. Employers are required to maintain adequate balances in the plan, from either contributions or earnings, in order to attain the benefit results.
Pros of a Defined Benefit Plan for Employees
- The employer takes all the risks, not the employee
- Benefits are predictable which makes planning retirement easier
- Benefits are not dependent on returns on assets
- Benefits can be accrued in a short time period
- The longer you are at a company, the more you could earn towards retirement
- The surviving spouse is entitled to the benefits if the employee passes away
Cons of Defined Benefit Plans for Employees
- You can’t withdraw from the plan like you can with a 401(k)
- Length of employment and salary history can be considered when calculating the formula
Positives of a Defined Benefit Plan for Employers
- Contributions are decided by the employer and are tax deductible
- The plan is predictable
- Businesses of any size can use a defined benefit plan
- It can be a very attractive benefit to offer employees, especially older ones
Drawbacks of Defined Benefit Plans for Employers
- These plans are costly for the employer
- Plans can be administratively complex
- Penalties may be incurred if regulations or funding requirements are not met
Visit our website to learn more about the different types of retirement plans. Have more questions? Contact us today to see how we can help you plan for your retirement.
