Defined benefit retirement plan is a retirement fund strategy whereby the employer promises a particular payment of pension that was previously determined by a formula based on the history of the employee and his or her employment conditions and age. The primary objective of the defined benefit plan is to provide insurance against any loss of income in the event of death, disability or retirement. This implies that a defined-benefit requirement plan is an insurance program while a defined-contribution retirement is a plan aimed at accumulating savings through postponed earnings on savings and compensation.
In relation to defined-benefit, the employer promises to pay in the event of named eventualities such as death or disability and the amount of the benefit is based on the pay, terms of service and the age of the employee (Jackson, 2014) . This is different in the case of defined contribution whereby the employer makes a promise to make periodic contributions to the account of each member and the amount varies depending on age, pay, service, and individual contributions. Also, the cost of defined benefit is on the employer while taking into account the returns on investment earned through actuarial experience. On the contrary, the employer has the responsibility of contributing the amount promised by individual members.
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Jackson (2014) explains that defined-benefit plans are quite pricey than defined-contribution plans for companies while defined-benefit strategies are less risky than defined-contribution plans to employees. On the contrary, the defined-contribution strategies are riskier for employers. Defined contribution plan provides the individual employee with more resources because the contributions are limited to the owner of the business and the plan is funded by the employer. Also, the annual contributions by the employees are not necessary in regard to defined contribution plan.
Under defined contribution plans, the preferred tax has slowly increased in the last 25 years. The participation of full-time employees at middle level enterprises increased to 51% and in the defined contribution plan, the participation in the plan has increased thereby benefitting contributions from employers.
References
Jackson, J. B. (2014). No One Loves Your Money Like You Do: The Ultimate Retirement Planning Guide for Business Owners and Private Practitioners. New York City: McGraw Hill Professional.
