Compare and contrast the risks to the employee in regard to defined contribution and defined benefit pension plans.

Question

What will be an ideal response?

Answer 1

In a defined benefit pension plan, retiring employees are guaranteed a particular payment level (the retirement benefit is "defined"). However, in a defined contribution pension plan, the only guarantee to employees is that the employer will contribute a set dollar amount on their behalf to the pension plan (the contribution is "defined"). While the pension benefits under a defined benefit plan are fixed, the pension benefits of the defined contribution plan vary according to the success of the plan's investments (superior investment decisions will yield greater pension payments than mediocre or poor decisions).Under the defined benefit plan, retiree risk is largely limited to whether the fund is properly funded and whatever effects inflation will have on their fixed pension checks. Under the defined-contribution plan, retiree risk is associated with the general risks and rewards of investments, the quality of investment advice, and the risks commonly associated with the defined-benefit plans.