Retirement - 46: Defined Contribution & Defined-Benefit Plan Characteristics Flashcards
The plan document specifies the employer contributions.
Defined-contribution
The plan document specifies employee benefits, and then employer contributions are determined by actuarial computations. Assumptions include investment return, life expectancy of retirees, number of employees who reach retirement (turnover), and salary levels of employees prior to retirement.
Defined-benefit
Employers’ deductible contribution is limited to 25% of participant payroll.
Defined-contribution
Annual benefit limit: (1) $210,000 or (2) 100% of the top 3 consecutive years’ compensation. The employer must satisfy minimum standards and can deduct more than 25% of payroll.
Defined-benefit
Subject to section 415 “annual additions limits” of the lesser of 100% compensation or $52,000.
Defined-Contribution
Individual accounts are established.
Defined-contribution
Not subject to section 415 “annual additions limits.”
Defined-benefit
No individual accounts, just commingled funds.
Defined-benefit
Voluntary employee contributions are allowed in some plans, such as 401(k) salary deferrals.
Defined-contribution
Employees do not contribute.
Defined-benefit
Forfeitures reduce the employer’s contributions.
Defined-benefit
Forfeitures can be reallocated to the remaining employees or used to offset future employer contributions.
Defined-contribution
Employers do not guarantee a particular level of benefit at retirement; benefits depend on investment return and number of years of contributions.
Defined-contribution
Employee benefit levels are specified and guaranteed.
Defined-benefit
Employees bear the investment risk (including inflation risk before retirement, and investment performance).
Defined-contribution
Favors younger employees.
Defined-contribution
Investment risk is born by employers (who must increase contributions to make up shortfalls).
Defined-benefit
Favors older employees.
Defined-benefit
Contributions can be allocated based on age-weighting and cross-testing to provide greater benefits to key employees or owners, but cannot be based on past service.
Defined-contribution
Lower administrative costs.
Defined-contribution
Benefits can be provided based on past service (entry age normal), and higher contributions are made for older, or highly-paid employees.
Defined-benefit
Higher administrative costs.
Defined-benefit
Costs are predictable.
Defined-contribution
Costs are less predictable.
Defined-benefit
No PBGC insurance coverage.
Define-contribution
PBGC insurance coverage is provided
Defined-benefit
