Retirement Plans And Retirement Plan

Retirement Plans

Plans are generally separated into two categories; defined benefit plans and defined contribution plans. Defined benefit plans include pensions. This type of plan guarantees a given amount of monthly income, less portability, and shifts the investment risk to the employer. Defined contribution plans such as a 401(k) allows the individual to choose investments. This puts the risk on the employee and does not guarantee any minimum or maximum benefits. 401(k)s are also very portable and vesting is almost immediate. 401(k)s have gained in popularity and most companies are switching to 401(k)s from a pension plan. A new plan has emerged which is being seen as the ideal retirement plan. This new type of plan is a hybrid of the two and offers the best features from each of the plans and is called a cash balance pension plan. Those who are not offered any type of retirement plan can get IRA’s which are available to everyone.

Both 401(k) and pension plans are qualified plans, this means, the plan is governed by the regulations in the Employee Retirement Income Security Act of 1974 and the tax code. This also means that agency matching is not required even though most so match. Matching is generally done up to a certain percent or under a profit-sharing feature.

Pension

Pensions are considered the traditional retirement plan. Companies large and small are moving away from this type of plan due to the risks and costs that the employer must burden. This lessens the risk to the employee while guaranteeing that they will have a specific income after retirement that may increase due to cost of living and inflation.

History

Even when popular pensions were not offered by every company and only 4 out of 10 people had pensions. P...

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...n limits of a pension plan with the flexibility and portability of a 401(k). The labor department describes it as a promised benefit in terms of a stated balance account.

Downfalls

The downside of the cash balance pension plan is that investments would be decided by the company or plan trustees which would give less control to the individual. While this plan may benefit most of its participants a company switching from a pension plan may be harmful to long time contributors to those pensions. Traditional pension plans us an average high pay to determine distribution amount. The cash balance plan contributions are at the same rate but the money is allowed to build interest over time. This benefits younger workers but hurts older workers where their money has not had time to build interest.

This plan is still fairly new and is not yet verified to be a successful plan.