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ERISA • Employment Law

Defined Benefit Plans vs. Defined Contribution Plans: What’s the Difference?

15 Sep 2020

The Employee Retirement Income Security Act (ERISA) governs two different types of employer-sponsored retirement plans, which are called defined benefit plans and defined contribution plans. Whichever plan you are a part of, it is important to understand your rights under ERISA and when these rights might have been violated. Never hesitate to discuss any ERISA retirement plan concerns with a Philadelphia retirement benefit lawyer. 

Defined Benefit Plans

This type of retirement benefit plan is commonly referred to as a pension plan. This plan provides qualified employees with guaranteed benefits for life after they retire from their employment. Employees do not have to contribute part of their income to a fund to receive this benefit. Instead, proceeds from a defined benefit plan are either fixed from the start or determined by a formula based on years of service, salary, and other factors. 

Employees generally have no control over defined benefit plan funds until they are eligible to start receiving benefits. The employer is responsible for investing and distributing these funds to retired employees, so the employer takes the risk that investments might not cover the benefits owed to a retired employee.

Due to the risk of an employer regarding defined benefit plans, these funds must be managed according to technical actuarial projections. In addition, the funds are often covered by federal insurance through the Pension Benefit Guaranty Corporation (PBGC). The requirements to protect and administer defined benefit plans can be costly, so this type of plan has become significantly more rare in recent times in the private sector as companies are choosing to shift solely to defined contribution plans. 

Defined Contribution Plans

These are retirement plans that are primarily funded by employees themselves, though some employers offer matching contributions up to set limits. Employees can choose whether or not they want to contribute, as well as how much (up to a maximum annual amount). Examples of defined contribution plans include:

  • 401(k) plans;
  • 403(b) plans;
  • Profit-sharing plans; and
  • Employee stock ownership plans.

The employer makes no promises regarding the available benefits upon retirement, as the employee will receive the amount in their plan based on their contributions, matched contributions, and investment gains or losses. Although Employers are required to act prudently in administering the plans and identifying investment options for participants, they are not obligated to guarantee the performance of specific accounts, so these plans require fewer resources for companies, making them much more popular. Employees are instead responsible for determining how they want to invest their funds, and options generally include mutual funds, money market funds, individual stocks, and annuities. 

Contact a Philadelphia Retirement Benefit Attorney for Assistance

Employers must administer retirement benefit plans in accordance with ERISA requirements. It is important to know your rights as an employee under the law, and if you think your employer is in violation of ERISA, discuss the matter with a retirement benefit plan lawyer at The Garner Firm, Ltd. Contact us to schedule an appointment to discuss your concerns today. 

Experienced Counsel

Mr. Garner is an ERISA employee benefits and employment attorney with over a decade of experience. The laws governing employee benefits, the employment relationship, and the workplace are complex.

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