Question

A)  Distinguish between defined benefit plans and defined contribution plans?

B)  In your opinion, which plan is considered better for individuals , particularly in tough economic times, and why? (Explain your answer).

Answer 1

Defined benefit pension plans:
It is a Pension plan which promises their beneficiaries a certain amount during their retirement.

1. The benefits during retirement are defined.
2. The employer's contribution is not defined.
3. The pension fund manager chooses the Investments.

Defined contribution pension plans:

It is a plan in which participants contribute a certain % of their payroll to their own retirement plan accounts, usually in form of a deduction in their payroll.

In some cases, the sponsor also contributes an agreed amount to their participant's accounts.

1. The benefits of the member during retirement is not defined.
2. The employer's contribution is defined.
3. The pension fund manager chooses the Investments.
4. The members choose their own investments.

During the recession, the Defined benefit pension plans are useful because they give a guarantee of a certain benefit to the members.