Defined benefit plans and defined contribution plans are helpful retirement investing tools, but they are not interchangeable terms.
With defined benefit plans, sometimes called DB plans, employees receive a retirement benefit provided by the employer based on salary and years of service, according to the financial services firm, TIAA-CREF
Such DB plans can be funded solely by contributions from an employer. They may also require an employee to contribute.
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These plans offer a lifetime income stream with little risk, as the funds are managed by professional firms and also pooled. Typically, benefits are calculated based on career earnings at the end of their work life.
A defined contribution plan, referred to as a DC plan, is a team effort between employer and employee. Both contribute funds to an employee's retirement account. The amount contributed is typically a percentage of the employee's salary.
TIAA-CREF noted that such plans, with a fixed annuity option, also can offer a guaranteed lifetime income.
One benefit to DC plans is their portability. As more employees change jobs, that option is benefitting more and more people, TIAA-CREF said.
Rules for contributions to both DB and DC plans are covered by the U.S. Department of Labor. They are mandated by the Employee Retirement Income Security Act (ERISA) of 1975. ERISA,
Rules for the plans are outlined on the federal agency's website. The DOL noted ERISA "does not cover retirement plans
established or maintained by governmental entities, churches for their employees, or plans which are maintained solely to comply with applicable workers compensation, unemployment or disability laws."
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CNN reported that a DB plan
is a better deal for employees, because they do not shell out money from their wages for benefits. That falls to an employer. With a DC plan — like a 401(k) or 402(b) plan, employees must make contributions.
DB plans have been cut back drastically by employers in the past few years. Some, however, still offer both, CNN said, adding: "If you still have a defined benefit plan at your company, consider yourself lucky."
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