Defined-Benefit Plan – A traditional plan often offered in government and unionized workplaces which guarantees a set benefit based on earnings and years of service.
– Employer manages the plan and is responsible for any shortfall needed to pay benefits, although in some rare cases employees will be asked to pool funds to make up the difference.
– Early retirement often possible, although with reduced benefits depending on circumstances.
Defined-Contribution Plan – Employees and employers both make contributions to the plan but the size of the benefit is determined by investment returns.
– The employer will generally oversee and contribute to the plan, but employees are in charge of deciding how to invest the funds.
– Funds can be taken out any time prior to retirement.
Target-Benefit or Shared-Risk Plan – Invented in the Netherlands, these hybrid plans have become popular in Europe.
– May guarantee a certain payout, but the majority of the benefit is determined by investment returns. Employers and employees assumed an equal risk for the guaranteed portion.
– No set guidelines on how these plans are administered.
Follow us on Twitter: