Over the years we’ve seen a significant change in pension plans and today I wanted to talk to you about the defined benefit plan versus the defined contribution plans and what’s been happening over the years.
What is a defined benefit plan?
According to Investopedia, a defined benefit plan is a retirement plan that is provided by the employer and is often called a pension plan. The company contributes on behalf of the employee and at retirement the employee may elect to receive a monthly income or sometimes will be given the opportunity to receive a lump sum instead of the monthly payments.
What is a defined contribution plan?
A defined contribution plan on the other hand, is where the employee contributes their own money and the employer may contribute or match the employee’s contribution. Some commonly known names of defined contribution plans are 401(k)s and 403(b)s.
What patterns are we seeing?
What difference does this make. According to the Department of Labor between 1975 and 2014, defined benefit plans i.e. pensions, fell in the private sector by 57% while during the same time period defined contribution plans i.e. 401(k) plans, increased by 208%.
It’s obvious that employers are shifting the retirement responsibility to the employee and less burden to them in the form of increased 401(k) and 403(b) plans.
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