Benefi ts 291
A defi ned - benefi t plan is a pension plan that specifi es the benefi ts or the
methods of determining the benefi ts at the time of retirement but not
the level or rate of contribution. The benefi t amounts to be paid are deter-
mined by a formula that weighs the retiree ’ s years of service, age, and
salary history. An advantage of defi ned - benefi t plans is that employees
and employers can estimate the probable size of their pension benefi ts by
assuming retirement dates and salary histories. Because taxpayers back
public pensions, they are guaranteed.
In defined - contribution plans , the employer guarantees that specified
contributions, usually a percentage of annual salary, will be deposited to
employees ’ accounts every year that they work. These accounts are
invested. Employees are provided with a variety of investment options
from which to choose. When they retire, they receive lifetime payments or
annuities, with the size determined by the amount on deposit, the interest
rate earned on funds in the account, and the length of time during
which the annuity is expected to be paid. The employee, the employer, or
both may contribute to the pension plan.
A variety of employer - assisted defi ned - contribution pension plans are
available to employees. The most common are 401(k), 403(b), and Sec-
tion 457 plans, which are set up by employers and funded by employees.
Employers design the plan and handle the automatic payroll deductions
and paperwork. Employees make contributions and assume the investment
risk and responsibility. As part of the Pension Protection Act of 2006,
agencies may invest their employees ’ retirement savings in 401(k) plans
without being held liable for losses. Under the new rules, employees could
be enrolled in a employer - sponsored retirement program unless they opt
out of it. Employers may match part or all of a worker ’ s contribution. No
federal agency guarantees the solvency of these plans. The 401(k) plans
are used primarily in the private sector although they are available to
nonprofi ts, and 403(b) plans are typically used by nonprofi t organizations
that are exempt under Section 501(c)(3) of the Internal Revenue Code.
Public schools and colleges may also provide 403(b) retirement plans for
employees. Section 457 plans are offered to employees of state and local
governments and nonprofi t organizations as a supplement to other defi ned -
benefi t and defi ned - contribution plans. Contributions remain assets of the
employer until they are distributed to the participant and are vulnerable to
creditors if an employer goes bankrupt. Money is held in a trust, a custodial
account, or an annuity contract.
Defined - contribution pension plans are becoming more popular
as more employers have realized the expense and long - term liabilities