User:Rebecca E. Harvey/Defined benefit pension plan: Difference between revisions
imported>Rebecca E. Harvey No edit summary |
imported>Rebecca E. Harvey No edit summary |
||
| Line 1: | Line 1: | ||
A '''defined benefit pension plan''' is a type of retirement plan in which an employer allocates specific amounts of money for participating, vested employees in a tax deferred account.<ref>http://www.businessdictionary.com/definition/defined-benefit-plan.html</ref> The plan is "defined" because the formula for calculating the amount contributed by an employer is known in advance. Differing from a [[defined contribution plan]], the benefits a retiree receives from a defined benefit plan (commonly referred to as a ''DB plan'') are not dependent on the success or failure of the portfolio in which the employer's contributions are invested.<ref>http://financial-dictionary.thefreedictionary.com/Defined-Benefit+Plan</ref> This distinction places the entire liability of economic market | A '''defined benefit pension plan''' is a type of retirement plan in which an employer allocates specific amounts of money for participating, vested employees in a tax deferred account.<ref>http://www.businessdictionary.com/definition/defined-benefit-plan.html</ref> The plan is "defined" because the formula for calculating the amount contributed by an employer is known in advance. Differing from a [[defined contribution plan]], the benefits a retiree receives from a defined benefit plan (commonly referred to as a ''DB plan'') are not dependent on the success or failure of the [[portfolio]] in which the employer's contributions are invested.<ref>http://financial-dictionary.thefreedictionary.com/Defined-Benefit+Plan</ref> This distinction places the entire liability of economic market fluctuations and the particular portfolio's performance on the employer (or the ''plan sponsor''). The benefit a participating employee (or a ''participant'') will receive is traditionally calculated based on length of employment and terminal wages.<ref name=Investopedia>http://www.investopedia.com/terms/d/definedbenefitpensionplan.asp</ref> In some instances, the management level of a participant will also factor into the calculation. Because of the plan's tax-deferred status, there are restrictions on how early benefits can be received.<ref name=Investopedia /> The academic study of retirement is in the field of [[financial economics]]. | ||
| Line 23: | Line 23: | ||
==Criticisms== | ==Criticisms== | ||
Although the performance of the pension's portfolio does not affect payments made to retirees, some critics of defined benefit plans argue that participants should have a higher degree of control over the investments.<ref name=CNNDisat>http://money.cnn.com/retirement/guide/pensions_basics.moneymag/index10.htm</ref> The most common argument for this is that participants can't invest more in their plans if they want to. If a DB participant desires a higher post-retirement payout, he or she must take out a separate IRA or [[defined contribution plan|401(k)]], if available. | |||
Defined benefit plans also traditionally have no adjustments for [[inflation]] post-retirement.<ref name=CNNDisat /> If a retiree is receiving $400 per month for the rest of their life, this amount will not increase even if the [[price index]] doubles, reducing the real value of the $400. | |||
==Related pension plans== | ==Related pension plans== | ||
| Line 32: | Line 35: | ||
==Notes and links== | ==Notes and links== | ||
===Related articles=== | |||
*[[Financial economics]] | |||
*[[Macroeconomics]] | |||
===Further reading=== | ===Further reading=== | ||
===Selected external links=== | ===Selected external links=== | ||
Revision as of 07:37, 29 October 2010
A defined benefit pension plan is a type of retirement plan in which an employer allocates specific amounts of money for participating, vested employees in a tax deferred account.[1] The plan is "defined" because the formula for calculating the amount contributed by an employer is known in advance. Differing from a defined contribution plan, the benefits a retiree receives from a defined benefit plan (commonly referred to as a DB plan) are not dependent on the success or failure of the portfolio in which the employer's contributions are invested.[2] This distinction places the entire liability of economic market fluctuations and the particular portfolio's performance on the employer (or the plan sponsor). The benefit a participating employee (or a participant) will receive is traditionally calculated based on length of employment and terminal wages.[3] In some instances, the management level of a participant will also factor into the calculation. Because of the plan's tax-deferred status, there are restrictions on how early benefits can be received.[3] The academic study of retirement is in the field of financial economics.
Calculation of defined benefit pension plans
Types of defined benefit plans
Flat benefit plan
Unit benefit plan
Variable benefit plan
Qualified plan
Non-qualified plan
article and before a bibliography.[4] in the text by using [4]
Types of payouts available
Management of defined benefit plans
Federal retirement laws
Investment strategies
Benefits
Criticisms
Although the performance of the pension's portfolio does not affect payments made to retirees, some critics of defined benefit plans argue that participants should have a higher degree of control over the investments.[5] The most common argument for this is that participants can't invest more in their plans if they want to. If a DB participant desires a higher post-retirement payout, he or she must take out a separate IRA or 401(k), if available.
Defined benefit plans also traditionally have no adjustments for inflation post-retirement.[5] If a retiree is receiving $400 per month for the rest of their life, this amount will not increase even if the price index doubles, reducing the real value of the $400.
Related pension plans
Cash Balance Plan
Money Purchase Plan
References
- ↑ http://www.businessdictionary.com/definition/defined-benefit-plan.html
- ↑ http://financial-dictionary.thefreedictionary.com/Defined-Benefit+Plan
- ↑ 3.0 3.1 http://www.investopedia.com/terms/d/definedbenefitpensionplan.asp
- ↑ 4.0 4.1 Chicago Manual of Style, 14th ed., Part 1, see section 1.82, "Back Matter." This edition of the Chicago Manual of Style discusses the construction of a "book."
- ↑ 5.0 5.1 http://money.cnn.com/retirement/guide/pensions_basics.moneymag/index10.htm