Defined Benefit Plans

Defined benefit plans are employer funded retirement plans. Not all employers offer this option. They are usually only found in larger companies.

With this type of plan, benefits are typically determined based on several factors.

  • Employee’s average salary before retirement
  • Age at retirement
  • Length of employment

Sometimes however, these plans offer a flat amount paid to all retired employees who have worked the required number of years.

If your company offers this type of plan, they will make all the investment decisions as well as take on all the investment risk. They are responsible for funding the plan regardless of the company’s profitability.

One of the most popular plans is the pension plan. If your company offers a pension plan, assuming you are vested, you can look forward to receiving some type of regular income after retirement.

Often you will be given the opportunity to contribute a certain amount each year to this plan. This is a tax-deferred plan since you are only taxed when disbursements are made. Even then you will only be taxed on the amount you receive each year and not the total amount in your account.

Another popular option is the cash-balance plan. With this plan, your account will typically be credited a percentage of your salary each year as well as an interest credit. These plans will usually pay a certain defined amount to you each year after retirement. Some even offer the option to take a one time lump sum payment.

Again you will be taxed on the amount you receive each year so you actually collect more of your money and pay less in taxes if you choose to have the disbursements paid over time instead of all at once.

If you leave the company prior to retirement you can usually roll over your account balance into an IRA or another company’s retirement plan without being penalized.

If your company offers a defined benefit plan, consider yourself fortunate. Allow the money to grow untouched and you’ll reap the rewards at retirement.

From Defined Benefit Plans to Investing Money