| There are many different retirement insurance | | | | These plans are contributed only by your |
| plans available for retirees. Some are affiliated | | | | employer, but sometimes have stipulations that |
| with your company; others are available through | | | | require contributions to be made by the employee |
| the federal government or private companies. | | | | as well. |
| Defined benefit plans are a type of pension plan | | | | Pros and Cons of Defined Benefit Plans |
| that will benefit you throughout your retirement. | | | | As in any retirement insurance plan, there are |
| The defined benefit pension plan was the most | | | | pros and cons to defined benefit plans based on |
| common type of pension plan before 401k plans | | | | different factors: income, age, how long you've |
| took over (which is a form of a defined | | | | been working with a company. Some pros of this |
| contribution plan). Still, labor unions tend to still use | | | | plan are |
| this plan, as do self-employed individuals or | | | | - Significant benefits possible in a relatively short |
| business owners with a small amount of | | | | period of time |
| employees. These pension plans need a substantial | | | | - Employers can contribute (and deduct) more |
| amount of money being pumped into the | | | | than under other retirement plans |
| investments, so more affluent workers are more | | | | - Plan provides a predictable benefit - Higher |
| likely to look into this as the best retirement | | | | annual retirement benefits possible, up to |
| insurance plan. | | | | $195,000 per year |
| What is a defined benefit plan? | | | | - Plan can be used to promote certain business |
| A defined benefit plan is an employer-sponsored | | | | strategies by offering subsidized early retirement |
| retirement income plan that promises a specified | | | | benefits |
| monthly benefit at retirement. The promised | | | | - Greater design flexibility |
| amount could be a defined amount, say $200 | | | | However, on the other side, some of the cons of |
| month. However, it is more commonly based on a | | | | a defined benefit plan are |
| formula using factors such as salary history, your | | | | - The most costly type of plan |
| age, duration of employment, etc. The company | | | | - The most administratively complex plan |
| controls all of the investment risk and portfolio | | | | - An excise tax applies if the minimum |
| management and is protected, with certain | | | | contribution requirement is not satisfied |
| limitations, by federal insurance. | | | | - Annual return required |
| According to the IRS website, a defined benefit | | | | - Annual nondiscrimination testing required |
| plan is a valuable and smart option to consider | | | | - May delay vesting of participants' accrued |
| when making the choice between retirement | | | | benefit |
| plans. Some of the reasons are | | | | Keep in mind that defined benefit plans tend to |
| - Employers can generally contribute more than to | | | | need a steady stream of money going into them, |
| other types of plans | | | | so if you are living paycheck to paycheck, or are |
| - Substantial benefits can be provided - even with | | | | worried about how your retirement income will |
| early retirement | | | | supplement how you are used to living, this might |
| - Vesting can be immediate or spread out over a | | | | not be the retirement investment plan you should |
| seven-year period | | | | be looking for. |
| - Benefits are not dependent on asset returns | | | | |