Workers can count on getting paid the money contributed to their retirement account. There is an opportunity for either the employer to add up the retirement benefits or the worker, or both.

A Secure Employer's Promise

Defined benefit plans are secure deals that last for life. Generally, the employer makes all the contributions and the worker gets the money paid in monthly annuities starting at retirement. The federal Employee Retirement Income Security Act (ERISA) sets the standards employers have to use to guarantee a pension to a worker in an amount they can depend on. The employer has to make the plan payment amounts known to the workers so they know exactly how much to count on for their life after work. They can give their worker certainty by stating a fixed dollar amount for the monthly annuities that will get paid, such as $100, or a formula such as the 1 percent of the average salary during the last five years of work times the total service years.

The federal Pension Benefit Guarantee Corporation insures workers so they will always have support. A part of their pension is the least they can count on the corporation paying if they lose their pension.

Work Pays During Retirement

Workers can save their own dollars one at a time and count on getting that money plus any investment return during their retirement. Defined contribution plans store up money earned during a pay period. The worker agrees to have an amount of income taken out of their pay before taxes each time they are paid. In some plans, the employer matches the contribution by making a contribution of their own up to an agreed percentage. It is an agreement the worker has more control over than the traditional pension agreement. They chose the investment option.

At retirement, they can get the lump sum or, in some cases, a monthly annuity payment. The total amount is the amount they contribute, and any employer contribution, plus investment gain or loss, and any fees.

401(k) plans are a common kind of defined contribution plan that has grown in popularity. The investment options give the worker opportunity to chose to grow their investment a conservative amount, a moderate amount, or, by using an investment account with more risk, enough to pay for large plans during retirement. There are other specific types of defined contribution plans a saver can compare to the 401(k). Three types are the individual retirement account (IRA), the employee stock ownership plan (ESOP), and the profit-sharing plan.

Differences in Retirement Contribution Plans

All the retirement savings in the plan will be there after the last day of work. But, where the money is put and how the investment is handled is not the same. A bank or a mutual fund company stores the IRA money in an account in the worker's name. ESOP plan investments are made primarily in the employer's stock. Productivity pays off for workers that have a profit-sharing plan when the employer, at the end of the year, hands out profit made by the company that depends on its workers' productivity to be put into their retirement plan account. The investment opportunities are judged by their security and their risk. The most important incentive for the choice is the amount that waits for a worker at retirement.

Counting on Average Savings

Not one of the plans is a disappointment. The productive days at work always do pay off in the end. Just count the dollars and cents in the account.

Source:

Employee Benefits Security Administration, What You Should Know About Your Retirement Plan (October, 2010).