Defined Benefit Plan

Defined Contribution Plan

CONTRIBUTIONS:

Benefits at retirement are calculated and contribution set accordingly. Limitations: $190,000 or 100% of compensation of highest three years.

Contributions allocated by a formula to an account. Lesser of 100% of compensation or $50,000.

FORFEITURES:

Used to reduce employer contribution to plan.

May be used to reduce plan contribution or be reallocated to participants.

MINIMUM FUNDING:

Generally has a required contribution each plan year.

May be discretionary or required, except money purchase plans.

PLAN TERMINATION INSURANCE:

Generally, plan benefits are insured by PBGC.

No guarantee of benefits in plan.

ENROLLED ACTUARY CERTIFICATION:

Required by the plan.

Not required.

PERMISSABLE DISTRIBUTION:

Permissible upon death, disability or retirement. May be lump sum or a life payment. Hardship withdrawals not permitted.

Permissible upon death, disability or retirement. Some in-service distributions allowed after contributing in plan for 2 years. Generally lump sum distributions. Hardship distributions available.

INVESTMENT GAINS/LOSSES:

Investment risk borne by employer. Gains can reduce employer contributions, and losses can increase contributions.

Participants bear ALL investment risk. Gains and losses will change amounts payable to participants.

ADVANTAGES:

Good vehicle for primary plan. Tends to favor long service and/or older employees. Provides for a lifetime payment. Relatively smaller payouts required for short service employees who terminate. Permits rapid funding for older long service employees (easier to provide past service benefits). Can be updated for inflation losses (pre or post retirement). Can provide for those already retired or near retirement.

Good vehicle for secondary or supplemental plan. Also good for a new company. Variable contributions permitted. Appropriate for younger workers with long time until retirement. Permits employees to direct investments and benefit, or be penalized by investment returns.

DISADVANTAGES:

Mandatory employer contribution generally required each year. ERISA regulation slightly harder to administer. Requires the certification of an enrolled actuary.

Employees bear risk or investments. Generally no lifetime payment available. Retirement may not be adequate for older employees. Inflation losses, rapid pay increases or poor investment performance can not be easily adjusted for. Employer can be open to criticism for investment performance. Employees tend to divert retirement funds for other purposes.