I've often heard of these two types of pension plans offered by companies:
- Defined contribution (DC)
- Defined benefit (DB)
What are they and how do they differ? Is one better than the other?
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Defined Benefit - the benefit you receive when you retire is defined e.g. $500 a month if you retire at age 65. It is up to the plan administrators to manage the pension fund, and ensure that there is enough money to cover the benefits based on the life expectancy of the retiree. Defined Contribution - the amount you contribute to the plan is defined. The benefit you receive at retirement depends on how well the investments do over the years. | |||
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http://en.wikipedia.org/wiki/Pension http://en.wikipedia.org/wiki/Defined_contribution_plan http://en.wikipedia.org/wiki/Defined_benefit_plan In short, defined contribution plans yield different amounts of return based on the market whereas defined benefit plans yield predetermined amounts defined based on factors such as salary and years of service. | |||
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