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Defined Benefit Plan vs. Defined Contribution Plan. Most are familiar with defined contribution plans like a 401(k). You might be wondering how these accounts differ from a defined benefit plan.
Defined benefit (DB) pension plan is a type of pension plan in which an employer/sponsor promises a specified pension payment, lump-sum, or combination thereof on retirement that depends on an employee's earnings history, tenure of service and age, rather than depending directly on individual investment returns.
Retirement plans are classified as either defined benefit plans or defined contribution plans, depending on how benefits are determined.. In a defined benefit (or pension) plan, benefits are calculated using a fixed formula that typically factors in final pay and service with an employer, and payments are made from a trust fund specifically dedicated to the plan.
In November 2008, the voters of the city of Pacific Grove passed an advisory measure to leave CalPERS in favor of a defined contribution plan. [153] Among other arguments, CalPERS claims that defined contribution plans cost more to manage than defined benefit plans and fail to provide adequate funds to retirees. [154]
The self-employed have several plan options, including defined contribution plans such as a solo 401(k), SEP IRA and SIMPLE IRA. But they also have some defined benefit options, too.
Defined benefit plans and defined contribution plans are two employer-sponsored ways of helping to provide employees with a comfortable retirement. The difference between them lies primarily in ...