Definition-Benefit Retirement Plan

Under a defined-benefit retirement plan, you receive a promised or “defined” payout at retirement. These plans are usually noncontributory in which the employees do not have to pay anything into them. The payout, which you receive as taxable income is based on a formula that takes into account your age at retirement, salary level, and years of service. Moreover, the formulas can vary dramatically from company to company. Some focus only on salary during the final few years of services, which is better for you, while others use an average of all your years ‘salary as a based to calculate pension benefits. One commonly used formula is to pay out 1.5 percent of the average of your final 3 to 5 year’ worth of salary times your number of years.

Your contingent payments are not guaranteed. Instead, what you eventually receive depends on how well your retirement account performs. Many defined contribution plans allow you to choose how your account is invested (Keown, 2007). Moreover, in recent years the popularity of such programs has skyrocketed because they involve no risk to the employer. The employer’s job involves a bit of bookkeeping and making a financial contribution. Employers do not care what you eventually receive; their responsibility ends with their contribution. In effect, defined contribution plans pass the responsibility for retirement from employer to employee. By the same token, they also pass the risk, because they are not guaranteed. As a matter of fact, defined-contribution plans normally take one of several basic forms, including profit-sharing plans, money purchase plans, thrift and savings plans, or employee stock ownership plans (Keown, 2007). The profit-sharing plan entails the monetary contribution of the employer by the firm’s performance. Additionally, the money purchase plans entail the employer contributing a set percentage of employee’s salaries to their retirement plans annually. Similarly, the thrift and savings plan utilize employer percentage matches of the employees’ contribution to their retirement accounts. Likewise, Employee Stock Ownership Plans contribution is made in the form of a company stock. Lastly, 401(k) plan is a do-it-yourself variation of a profit-sharing/thrift plan. These can be set up as part of an employer-sponsored defined contribution plan, with both the employer and the employee contributing to the plan, or with only the employee making a contribution (Keown, 2007). Keown (2007) emphasize