Thursday, March 28, 2013

Defined benefit or defined contribution? There is a difference.

Unfortunately, my local paper -- the News and Observer, seems a little confused about the difference between a defined benefit plan and a defined contribution plan.

The relevant sentence in the article is:
The discussion comes as state leaders consider a shift from a pension program to a defined-benefit system.
This makes no sense.  The current pension program is a defined benefit system.

Just to be clear:

A defined benefit retirement plan is a plan where the beneficiary is promised a specific financial benefit based on some formula of years served and contributions made into the plan.   A pension plan is an example of a defined benefit plan.

A defined contribution plan is a plan where the beneficiary pays into the plan and gets a financial benefit that depends entirely on how well his/her contributions have grown in value.   A 401k plan is an example of a defined contribution plan.


Thanks to Ron for the link.