What is the difference between defined benefit and defined contribution pension plans?
| Question |
Defined Benefit Plans (DB) |
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Defined Contributions Plans(DC) |
| How are the benefits determined? |
It is determined by a formula based on earnings history and years of service. Typically, the employee contributes nothing to the fund.
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It is determined by the amount he or she has contributed, the amount of employer contribution, and the performance of the market.
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| What does a typical arrangement look like? |
A typical formula would be: the benefit equals the average of the highest five years of earnings, multiplied by the ratio of service to 20 multiplied by 0.6.
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A typical arrangement may be: the worker contributes 5 percent of his or her salary in into the plan and the firm contributes 10 percent.
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| Does the employer guarantee a certain benefit level to the employee upon retirement? |
The employer guarantees a certain benefit level at retirement.
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There is no guaranteed benefit level at retirement.
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| Who absorbs the risk? |
The employer absorbs all the risk.
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The employee absorbs all the risk.
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| What is the employer liable for? |
The employer retains the liability for paying the pension benefits.
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The employer’s liability ends after the money is contributed into the fund.
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| Is the plan portable? |
Typically, the plan is only partly portable.
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The plan is portable.
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