Contributions to a defined benefit plan are pooled to provide benefits for all participants who meet vesting and eligibility requirements. Guarantees a specific benefit usually paid in the form of an annuity.
Contributions are placed in an individual account. Investment earnings on contributions are credited to each employee's individual account. These plans do not guarantee a specific benefit level.
Money purchase plans: Employer contributions to a worker's account are fixed and usually a percentage of compensation.
Annuity plans: Employer makes a contribution on behalf of the worker and/or the worker can make after-tax contributions
401(k) plans: Worker contributes on a pretax basis. Employer/plan sponsor may make matching contributions.
Hybrid Pension Plans
Plans that have characteristics of both defined benefit and defined contribution plans. Examples include:
- Cash balance plans
- Age-weighted profit sharing plans
- Pension equity plans
- Target benefit plans
- Floor offset plans