Defined Benefit Retirement Plans
A list of defined benefit retirement plans should begin with the definition of the defined benefit retirement plans available. A defined benefit retirement plan is a form of employer sponsored retirement plan. Inside defined benefit retirement plans, benefits are based on an equation that points to the exact quantity an employee will receive upon retirement. The retirement benefit is normally based on a range of factors, comprising the employee’s average salary before retirement, age at retirement, and period of employment. Benefit amounts may be a specific dollar amount or a percentage of compensation.
Many individuals consider defined benefit retirement plans like a regular kind of monthly pension plan.
Usually the employer is responsible for making all contributions to the defined benefit plan. However, in some cases, employees make contributions as well. Typically, defined benefit plans are found in larger companies.
A defined benefit plan does not require employees to make investment decisions. The employer is responsible for making decisions and managing investments for the plan. Likewise, the employer assumes all investment risk. The assets of a defined benefit plan are held collectively, rather than in individual employee accounts. The employer is responsible for funding the plan as required, even during periods when the company fails to earn a profit.
Benefits from a defined benefit plan may be provided as a lump sum upon retirement or as monthly payments that continue for as long as the retired person lives. In some cases, defined benefit plans provide benefits to the employee’s beneficiaries after the employee’s death. Such details vary from company to company.
The three primary kinds of defined benefit plans are flat, unit, and variable benefit plans. A flat benefit plan requires the employer to pay all retired employees a fixed dollar amount, as long as a minimum number of years of service have been reached. For example, a flat benefit plan could require the payment of 30 percent of the average compensation amount paid to the employee for the final five years of employment. Alternatively, this type of plan could require a specific monthly payment to each employee who worked for the company for ten years or more.
In a unit benefit plan, the retirement benefit amount is determined by multiplying the percentage of compensation or even a specified dollar amount by the number of years of employment. For instance, the benefit might be either 5 % of the average compensation paid as an employee or even a $50 per month benefit for every year the employee had been working for the corporation in question. Total amounts and percentages vary.
A plan with a variable benefit requires a business to calculate benefit numbers around the allocation of units to plan contributions. With this type of defined benefit plan, the retirement benefit amount is calculated based upon a calculation of the units allocated to the employee when they retire. The value on the employee’s units are proportionate to the value of all the units inside the fund.
The use of Defined Benefit Retirement Plans is generally reserved for the employees at the executive level. Quite a few use of Defined Benefit Retirement Plans still happens in union pension plans.