Historic Purposes For A Pension Benefit Plan
1. the recruitment of new qualified personnel;
2. the retention of existing qualified and productive personnel; and
3. the encouragement of predictable and systematic out-transitioning of personnel at the end of their normally expected working career.
Types of Pension Plans
a. Defined Benefit Plans. The pension benefit amount that is ultimately payable is predeterminable or fixed using a formula or comparable arrangement. The fixed element of the benefit amount leaves a variable element, which is the funding required to provide that benefit.
b. Defined Contribution Plans. The funding for the pension plan is fixed as a dollar amount or a percentage of payroll. The fixed element of funding leaves a variable element, which is the benefit amount that is ultimately payable.
a. Defined Benefit Plans. The employer or plan sponsor has the inflation and investment risks. If the investment return on plan assets is poor or inflation produces ever increasing final salaries and benefit payouts, that risk is borne by the employer. The member has the turnover risks. If a plan member terminates with modest service having been rendered or at early ages, the member will receive either no benefit or an inadequate benefit.
b. Defined Contribution Plans. The plan member bears the inflation and investment risks. If there is poor investment performance, the plan member's pension assets will be depressed. If inflation impacts the immediate pre-retirement standard of living. The plan sponsor or employer loses any turnover gain potential, where past plan funding becomes more concentrated on a subgroup of the total plan membership.
a. Defined Benefit Plans. The plan type favors long term or long service employees. It also favors employees who receive regular promotions and sizable salary increases throughout their careers or who achieve substantial salary increases in their compensation at the end of their career. It also favors employees who retire at or before the planís normal retirement age.
b. Defined Contribution Plans. The plan type favors employees who are very employment mobile, where employment changes beyond a single employer or a multiple employer group. It also favors short term employees in comparison to defined benefit plans. It also favors employees with very stable and modestly increasing salary histories and employees who work beyond the planís normal retirement age.