Describe the two broad types of pension plans and identify how they differ from one another.
What will be an ideal response?
ANSWER:
The two broad types of pension plans are defined contribution plans and defined benefit plans. Defined contribution plans are those in which the benefit is defined as the future value of pension fund contributions and earnings. Contribution rates for defined contribution plans are normally stated as a percentage of wages or salaries. These plans may be either non-contributory, in which all contributions are made by the employer, or contributory, where funding is shared by the employer and employee. In defined benefit plans, the pension benefit is defined either as a specific dollar amount based on years of service or by a general formula based on salary. The benefit may be paid as either a single lump sum amount at retirement or as a life annuity.
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