Should I Choose A Defined Benefit Plan?

Posted on: 15 December 2019

There are many retirement plans that your provider might offer you. One type of retirement plan is a defined benefit plan. This is a retirement plan that determines your benefits based on a formula. For example, your salary history can play a role in the benefits you receive. If you are being offered this plan, it's important to understand what to expect from it so that you can decide if this plan is right for you.

The Benefits You Can Expect

The benefits that are paid out by a defined benefit plan are typically guaranteed for life. However, the benefits you receive can rise somewhat to account for increases in the cost of living. You might receive a specific pension payment or you may receive a lump-sum. In some cases, you may even receive a combination of both. Because the employer is responsible for bearing the risks of stock market fluctuations, you do not have to worry about if there is an economic downturn.

Defined Benefit Plans Vs. Retirement Savings Accounts

Because you will receive a specific payout, this makes your benefit plan different from a retirement savings account because the payout for a retirement savings account is based on investment returns. If there is a shortfall as a result of an economic downturn, your employer must make up the difference.

Factors That Affect Your Benefits

The main factors that can affect how much you are paid are:

  • Your salary history
  • Your age
  • The length of your employment

There has been a decline in the number of employers who offer a defined pension plan. However, they are still being offered more frequently by employers in the public sector. While pay-as-you-go plans are not allowed in the private sector, they are often used in the public sector for public pension programs in all OECD countries, including the United States.

Your employer funds the plan by contributing a specific amount regularly. This is usually a percentage of your pay. The employer contribution is effectively a deferred compensation. In some cases, you may also make contributions to your retirement plan. 

Payments to Beneficiaries

If you have beneficiaries, one thing to find out is if the plan will distribute benefits to your beneficiaries if you pass away. Some benefits will offer this perk, while others do not. The best way to find out if the retirement plan is right for you is to compare it to other plans. An investment adviser or financial planner can


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