Question

Respond to the following in a minimum of 175 words PLEASE TYPE RESPONSE:

In general, Social Security benefits and employee pension plan benefits do not cover enough of a typical retiree’s expenses, and many firms are discontinuing generous employee pension plans. 2 major types of employee retirement plans are defined benefit plans and defined contribution plans.

• What are the advantages of a defined benefit plan and defined contribution plan?
• What are the disadvantages of a defined benefit plan and defined contribution plan?
• If you could only select either a defined benefit plan or a defined contribution plan, which would you choose? Why?

Answer 1

Solution:

1). Advantages Defined benefit plans and Defined contribution plans

  Defined benefit plans

Defined benefit plan is an Employer sponsored retirement plan where employee benefits are computed using a formula. The formula may differ from compant to company. However , generally, it includes employement tensure and salary. The important part in defining the benefit plan is you would know what amount of funds would be deducted toward pension reserve and how much pension per month you would get on retirement . Hence this gives you a surety that your pension income is guaranteed.Upon reaching retirement , you have 2 options to select from, 1.To opt for monthly income till you die, called annuity payments. 2. To get the investment amount on lump-sum bases which would lead you to manage your funds till you retire. Advantages of the Defined Benefit Plans are

For Employees:

1. The employee would know its retirement amount in advance (from the day it signs the DBP contact)

2.Benefits are indifferent to stock market risk/fluctuations or increase/decrease in bond yield.

3.Comparing with DCP , the defined benefit plan generates a higher return on investments which would include premature / accidental death benefits to family members.

For Employers

1. Due to the stable and risk- free nature of the Defined Benefit Plan ,it leads to a higher workforce in the organisation. This promotes loyalty and helps to retain valued staff.

2. As these funds are collective investment and professionaly managed, the savings generate higher returns with relatively less expense ( cost of hiring portfolio manager, administration charges etc..)

Defined Contribution Plans

Defined contribution plan is a plan in which equally funds or percentage of income is contributed by employee and employer. Advantages og Defined Contribution Plans are

For workers

1. Portability

2. Immediate Vesting

3.Personel Control

4. Fair Benefits

5. Higher Benefits

6. Freedom of Choice

For tax payers

1. No investment risk

2. No political risk

3. No unfunded liability

4. Greater control over cost

5.Reduced cost

6. Improved employee recruitment

2) Disadvantages of Defined benefit plans and Defined contribution plans

Disadvantages of Defined benefit plans:

1. Employees would not have control on funds, i.e they would not know where their funds are invested as an investment decision and handling is done by experts.

2. Employees exactly know how much they would get on retirement ,they do not have the option to increase their retirement benefit.

Disadvantages of Defined contribution plans

1. The funds offered to employees had too high expenses leading to inadequate returns;

2. Employees have chosen very unsatisfactory portfolio weightings ( particularly shares of their employer, which is disastrous if the firmfails)

3. The worker has no clear idea how large a contribution is needed to meet a target retirement income.

3) I choose Defined benefit plans. Because  Defined benefit plans (DBP) are better and mostly preferred for workers and employers because of the plan is considered more secure in comparison to the Define contribution plans (DCP) as its pensions can be easily predicted and it cost employers less to what DCP costs.