Can anyone explain what are defined benefit and contribution plan please?
I looked up on wiki for both definitions but am still quite confused…
The only part i grasped is that defined benefit plans is one-sided, employer contributing only; whereas defined contribution is when both employer and employee contribute to a pension fund or something
In the definition it talks about the investment return … etc, but i’m not too sure i get it.
Thank you
K
DB, risk is borne by the employer. i.e a potentially liability on the balance sheet
DC, risk (size of pension) is borne by the individual and therefore does not appear on the company’s balance sheet
In a defined contribution plan the employee and/or the employer contributes to a retirement account for that specific employee, an account that is managed by the employee. The employer is responsible only for their contributions (if any) to that account; they have no ongoing responsibility. In the US, a 401(k) plan is an example of a defined contribution plan.
In a defined benefit plan , the employer and/or the employees contribute to a pooled retirement account for all employees, an account that is managed by the employer, and from which the employer guarantees a given benefit to each employee upon retirement. The employer is responsible for ensuring that the assets in the account earn sufficient return to fund the retirement obligations. In the US, there are very few remaining defined benefit plans, some for government employees, and some for (generally large) corporations.