Defined-Benefit Plan
Candlefocus EditorUnlike a defined-contribution plan, where the employer contributes investment funds to an individual account and the employee assumes the risks and rewards associated with their investments, all of the risk and responsibility of a defined-benefit plan lies with the employer. This could include making investment decisions, covering administrative costs, and ensuring the plan meets certain funding requirements set by the government. The responsibility and risks taken by an employer can also include providing an adequate level of annual funding for the plan and being accountable for maintaining the solvency of the plan.
As defined by Internal Revenue Service (IRS) regulations and other laws, a defined-benefit plan may provide benefits in the form of a monthly annuity or a single lump sum payment. The payment amounts can depend on a variety of factors such as years of service, age, and final-average salary. The benefit can also be contingent upon the employee meeting certain criteria, such as retiring at the company's early retirement age. It's important to note that the benefit is also transferrable to the employee’s surviving spouse if the spouse outlives the employee.
For some employers, issuing defined-benefit retirement plans is a great way to attract and retain a quality workforce. Employees who have secure work in a defined-benefit plan may be more likely to stay with the company longer, especially given their vested interest in the value of their retirement plan.
Overall, employers who wish to provide the best possible retirement benefits to employees should understand the advantages and limitations of both defined-benefit and defined-contribution plans. While defined-benefit plans offer a guaranteed payment to the beneficiaries, employers will inevitably be responsible for the full risk and costs associated with it. Therefore, these plans should be carefully evaluated before implementation.