Company Retirement Plans

Another option for retirement savings is your company's retirement plan. Retirement plans can take many different forms. Tonight, we are going to talk about the two biggest classifications of plans--defined benefit plans and defined contribution plans.
Defined benefit plans are what people informally call "pension" plans. Now, actually, the word "pension" means something else officially in "retirement speak," but we'll talk about that later. A defined benefit plan is what people imagine after thirty years of service and a gold watch. Every month during retirement, the company sends a check of a set amount, and that money is a reliable source of monthly income. Defined benefit plans get their name because the amount of the benefit is defined to the recipient. In other words, you know how much money you get as a benefit each month in advance. If you have a defined benefit plan, you don't have to choose the investments because your employer chooses them, since they are liable for the benefit.
The other kind of plan, which is much more common, is a defined contribution plan. In a defined contribution plan, the company gives you an amount of money, defined by the plan formula, each month or year. All you know is how much money you receive--a defined contribution. The amount of your monthly benefit during retirement depends on your account balance. And the account balance depends upon how well you do with your investments because you are responsible to choose them. Now, I worded the definition kind of strangely because the plan formula could go two different ways--the promise of a benefit each year or a benefit that depends on whether or not the company made enough profit to contribute to the plan. Creatively, this is called a profit sharing plan, and it's a very popular structure.
So which do you have? A defined benefit plan or a defined contribution plan?
Be prosperous!
Peggy