Tags: Retirement | retirement | defined-benefit | traditional pensions

5 Things to Know About Defined-Benefit Plans, Traditional Pensions

By    |   Tuesday, 16 June 2015 08:23 PM

Defined-benefit plans such as traditional pensions, a mainstay of retirement in the 20th Century, are less common today for U.S. workers, with employers migrating to defined-contribution plans such as IRAs and 401(k)s.

But the old-fashioned retirement payout based on salary and years of service is still in use.

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Here are five facts about these retirement plans.

1. Disappearing Plans
CNN reports that 10 percent of private-sector workers have defined benefit pension plans, compared with 60 percent in the 1980s, and that the number could shrink more as "industries with a strong union presence, such as the airline and auto sectors … cut deals to either reduce or eliminate their plans."

2. Increased Pressure
Pension plans in the public sector are under increasing pressure. States and municipalities facing budget shortfalls also find themselves saddled with huge, unfunded pension liabilities for their police, teachers and government workers. The crisis has affected elections, triggered lawsuits and prompted efforts toward pension reform.

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3. Small Businesses
Defined-benefit plans are enjoying something of a comeback for small businesses, especially for well-compensated workers looking to catch up on retirement savings, although they are more costly to implement and maintain than the standard defined-contribution plan, The New York Times reported. Forbes contributor Winnie Sun said this new breed of upper-income pension plan offers higher tax-deferred contribution limits than 401(k)s and can also be a tool for retaining top employees.

4. Choice of Investments
Unlike 401(k)s, pension plans do not typically give employees a choice of investments. Instead, the employer contracts with a plan administrator to do the investing.

5. Cash Balance Plans
The other class of defined-benefit retirement is the cash balance plan, in which a company sets aside a percentage of salary each year and compounds the nest egg through interest.

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Defined-benefit plans such as traditional pensions, a mainstay of retirement in the 20th Century, are less common today for U.S. workers, with employers migrating to defined-contribution plans such as IRAs and 401(k)s.
retirement, defined-benefit, traditional pensions
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2015-23-16
Tuesday, 16 June 2015 08:23 PM
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