February 5, 2012
Pensions are defined as either a defined contribution plan or as a defined benefit plan. Both are still in use today but the defined contribution plan is now the preferred type of pension offered by most employers, as stated in the text on pg 937“ Today, approximately two thirds of workers covered by pension plans are covered by defined contribution plans, roughly one third by defined benefit plans. This represents a radical shift from previous years when the traditional defined benefit plan was far more common.”. In this paper I plan on explaining the difference between the two types of pension plans and how each one is accounted for by a company. To start I will explain the two types of pensions and how each one benefits the account holder and affects the company.
Defined contribution plans are the type of pension plans that most companies use today. Defined contribution plans are defined in our text on pg 937 as “Defined contribution pension plan promise fixed annual contributions to a pension fund.” . This type of pension is the most common type of plan because it requires the employer to pay less over the course of employee’s tenure with the company. The reason it cost the companies less money is because they only put in a set amount of money into the account for the employee. Most commonly it is seen as a 401k plan where the company matches a certain percentage of the employee’s contribution. This type of plan is easy for the company to account for because it requires the company to make one entry at the end of the year to account for the contributions.
Defined benefits plans are very rare in today’s world because of the expense to the company. Defined benefit plans are defined in the text on pg 937 as “Defined benefit pension plan promise fixed retirement benefits defined by a designated formula.” This plan is most often only seen being used by the local and... [continues]
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