According to the DOL, there are 2 types of pension plans covered by the Employee Retirement Income Security Act (ERISA) – defined benefit plans and defined contribution plans.
“A defined benefit plan promises a specified monthly benefit at retirement. The plan may state this promised benefit as an exact dollar amount, such as $100 per month at retirement. Or, more commonly, it may calculate a benefit through a plan formula that considers such factors as salary and service — for example, 1 percent of average salary for the last 5 years of employment for every year of service with an employer…”
Read more at the Department of Labor’s website
Payments to a defined contribution plan generally are invested on the employee’s behalf, and ultimately pay out the balance in their account, which is based on contributions plus or minus investment gains or losses. The value of defined contribution accounts fluctuates as the value of the investments does. Examples of defined contribution plans include 401(k) plans, 403(b) plans, employee stock ownership plans, and profit-sharing plans.
According to a November, 2012 article in the New York Times, “Defined Benefit Plans Allow Fast Retirement Saving But With Risks” for even late-starting small business owners who were deferring thinking about retirement savings to invest in the company itself.
Meanwhile, the big upside of a defined benefit plan in most cases (compared to the 401Ks, ESOPS, and other defined contribution approaches) is that it’s not your pay; the funding comes directly from your employer(s). So a defined benefit plan that doesn’t move with the stock markets or company value is a much more reliable pension plan.
