Retirement Benefits: Defined Benefit or Defined Contribution?

Retirement benefits fall into one of two categories: defined benefit plans or defined contribution plans.

The Defined Benefit Plan is the kind of retirement plan that employees used to receive along with the proverbial gold watch that they were awarded after years of loyal service to their employer. Today, however, that kind of plan is pretty much a thing of the past for the vast majority of employees, namely because they are too expensive for most companies. Typically, defined benefit plans are available only to people at the highest levels of management.

A Defined Benefit Plan comes as an automatic job benefit – you don’t choose whether to participate in it or not. The plan represents a promise from your employer that, when you retire, you will receive a predetermined amount of income each month or a monthly income that is based on a formula. The formula takes into account how long you worked for your employer, your salary, your age, and other factors.

You usually don’t have access to the money in your defined benefit plan until you’ve retired. Therefore, if your spouse wants to share in your retirement benefits, he or she has to wait for that money, just like you.

A Defined Contribution Plan is the type of retirement benefit that most employees are offered these days. Participation in a defined contribution plan isn’t automatic; if your employer offers one and you want to participate, you have to enroll in the plan. If you do enroll, you, your employer, or both of you contribute money to your plan. For example, your employer may agree to match your contributions 100%, 80%, or at some other level.

With this type of plan, your employer doesn’t offer any guarantees as to how much income your defined contribution plan will provide you when you retire. That amount depends on how much you and/or your employer contribute to your plan and on that kind of return you get from investing the money that is in your plan.

You can take money out of this type of retirement plan before you retire, although you have to pay an early withdrawal penalty and you may have to treat the withdrawal as taxable income. When you’re ready to retire, you can receive all your retirement dollars in a lump sum or you can receive payments over time.

Visit the website of the Federal Department of Labor’s Employee Benefits Administration (www.dol.gov/ebsa) for additional information on pensions in general and on the pension rights of spouses and former spouses in particular. You may also want to read an online version of “What You Should Know About Your Pension Rights” (www.dol.gov), a Department of Labor publication that offers a lot of useful information on employer-sponsored pension plans. You can also order a free copy by calling 866-444-3272. Yet another pension-related resource is the Pension Rights Center which you can access by going online to www.pensionrights.org or by calling 202-296-3776.