Trends in Retirement Plans

Defined Benefit Plan

A defined benefit plan includes any retirement plan in which the benefits are predetermined according to a schedule, and the contributions are set accordingly. The benefit can be in the form of a:

• certain dollar amount

• OR

• specific percentage of compensation

An employer with some employees who belong to an organized labor group and others who do not, may offer both defined benefit and defined contribution plans.

Defined benefit plans provide lifelong benefits that are available to employees when they retire (or slightly before retirement). Defined benefit plans don't track individual employee accounts. Employers make contributions to the plan to pay the retirement benefits their employees earn.

Employee benefits are a combination of:

• employer contributions

• AND

• income from investing plan assets

For defined benefit plans, an organization can use any of two vesting methods required under ERISA or use their own more generous schedule.

1. 5-year cliff vesting: 0% vested for less than 5 years of service; 100% vested after 5 years.
2. 7-year-graded vesting: 0% for years 1 and 2; 20% vested after year 3 and each subsequent year until 100% vested after 7 years.

The benefit amount is usually based on the following factors:

• earnings
• age
• number of years of service

In a defined benefit plan, an actuary is usually needed to calculate the employer's annual contribution.

There are different types of qualified defined benefit plans which may include a Cash Balance Plan, or a Pension Equity Plan. These types of defined benefit plans are relatively new, having surfaced in the last 20 years or so. All of these plans are subject to certain funding and other rules.

Cash Balance/Pension Equity Plans

Cash balance and pension equity plans are a type of defined benefit plan that credits a percentage of an employee's pay to an account while they are employed at a company. That amount (with interest added) is later paid to the employee during retirement.

The employer:

• manages assets
• makes contributions
• guarantees a return

Cash balance and pension equity plans offer more portability than do traditional pension plans. They also track and show individual account lump-sum balances.

Cash balance and pension equity plans tend to be more beneficial for job hoppers and younger employees since benefits accumulate at the same rate each year. Unfortunately, cash balance plans have the potential to hurt older workers by interfering with accelerated benefit growth late in their careers.