Defined Contribution Vs Defined Benefit Essay

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Retirement Plans

When it comes to defined retirement plans, there are two major forms that have dominated the employee benefit landscape. Indeed, those two types of benefits are defined contribution and defined benefit. While employers favor one of the two, employees roundly and definitively tend to favor the other. The form that employees tend to prefer will be answered and the same will be done for employers. There will also be an explanation of the answer given. While employees may like defined benefit plans, they come with a major financial obligation on the part of the employer and thus the employer favor defined contribution plans the vast majority of the time.

If there is a major distinction to be identified when it comes to the difference between defined contribution and defined benefit plans, it would be that one of them focuses on what employees are required to contribute and the other focuses on what the employees will get when retirement comes to pass. Of course, employees are going to tend to focus on what is extended to them when retirement comes. As such, employees will tend to gravitate to plans with defined benefits. The fine print of these plans is that the employee might or might not be required to contribute to the plan to make that benefit possible but the employer absolutely will have to do so. When the bill comes due, the employer will have to pay lest they default on the pension and retirement obligations of their employees (Martocchio, 2011).

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For that reason, there has been a rather concerted shift towards defined contribution plans. There is a definition of what (if anything) the employer will contribute to the plan and there is also a definition of what the employee will contribute or what they are allowed to contribute. So often nowadays, this is the benefit plan that employees have the option to enjoy and the defined benefit plan is quite often not even offered. If there is one mitigating effect to this happenstance, it is that employer will often match the contributions of the employees but only up to a certain percentage. For example, if an employer contributes a certain percentage of their earnings to their 401(k) retirement plan, the employer will tend to match some or all of that amount. A good real-world example is that an employee would contribute six percent and the….....

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