Defined Benefit Plans

Defined Benefit Plan: The Employee's benefit amount is specified in the Plan. The amount of contribution that the employer makes is based on the employee's benefit. In other words, the employer's contribution will need to be that amount necessary to provide the amount of employee's benefit that is stipulated in the Plan document.

The Plan can set a dollar amount per year of service (e.g. $10.00 benefit per month for each year of service).

The Plan can be based on a percentage of employee's salary and service (e.g. average of last 5 years salary times years of service times 2% equal monthly benefit).

Benefit can be received as a straight life annuity, a joint and survivor annuity or a guaranteed annuity for life and 30 years certain.

Defined Contribution Plans

Contributions are made by the employer with voluntary or mandatory employee contributions. These funds are invested in savings, stocks, mutual funds or annuities. Upon retirement the employee has a lump sum of cash. He then can buy a guaranteed annuity or take the lump sum.

Types of Defined Contribution plans are Money Purchase Plans, 401K Plans, Profit Sharing Plans, Simplified Employee Pension Plans, Tax Sheltered Annuities, Employee Stock Option Plans.

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