FAQs About Benefits—Retirement Issues

What are the basic types of retirement plans?

  • A defined benefit (DB) plan is the so-called "traditional" work-place pension, historically paid in the form of an annuity. The benefit is based on a formula, typically involving salary and length of service. Private-sector pensions typically are financed entirely by the employer and are not "portable" from job to job.

  • By comparison, a defined contribution (DC) plan guarantees no ultimate benefit at all. Rather, it is financed with contributions from the worker and/or the employer. The worker generally controls how the contributions are invested (within a limited range of options), which gives him or her more control over the funds, but also more risk. These benefits can be "rolled over" upon leaving a job. There are various types of DC plans, the most common and well-known being the 401(k) plan. Defined contribution plans (especially 401(k)s) have been growing in recent years.

  • Cash balance plans combine elements of both defined benefit and defined contribution plans, but do so in a way that gives the employer a more precise projection of future obligations. Typically, an employer contributes a defined amount annually, based on compensation, and guarantees that the account will grow by a fixed percentage annually. A worker reaching retirement age can typically take the accrued amount either as a lump sum or an annuity. Converting existing defined benefit plans into cash balance plans has spawned some thorny legal questions about how to fairly deal with senior workers. After a spate of cash balance conversions by large employers, political controversy and an absence of government guidance on what transition rules are appropriate has deterred many employers interested in making such a change from doing so in recent years.

  • Individual retirement accounts (IRAs) allow a person to set aside and invest a contribution each year in an individual account. There are several different types of IRAs, and in recent years Congress has expanded them for nonretirement purposes (such as education). IRAs are typically used as a holding vehicle for money that is "rolled over" from another retirement plan upon job change, such as a 401(k).

  • Keogh plans are tax-deferred retirement accounts for self-employed workers or persons employed by unincorporated businesses.

General Overview of Benefits
Retirement Issues
Health Spending and Insurance Issues
Other Benefit Issues