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Defined Benefit Plan A primary difference between the "Defined Contribution Plans" like the 401(k) Plan or Profit Sharing Plan and a "Defined Benefit Plan" is that the investment risk under a "Defined Contribution" Plan lies with the employee participant and the investment risk under the "Defined Benefit" Plan lies with the employer sponsor. The "Defined Benefit" Plan defines and promises a specific benefit at some point in the future. This defined benefit is provided typically at the retirement of the employee participant. For example, a typical benefit may be a monthly income starting at age 65 equal to 50% of the employee's average salary over the last three years of work. The employer is required to contribute, and may deduct, whatever amount is actuarially necessary to assure the benefit is funded, which places the investment risk with the employer, not the participant. If the investments do not perform as projected, the employer may have more to contribute in the future. Because benefit accrual tends to reward long-term service, and because with older employees there is less time for assets to accumulate to fund the benefit, contributions for older employees generally are much higher than younger employees. Thus, older business owners, seeking large contributions often favor defined benefit plans. For aging management groups who have little chance to save for retirement, a defined benefit plan is an excellent way to make up for lost time. A defined benefit plan provides the only way for companies to make annual tax-deductible contributions for their employees in excess of $40,000 or 100% of pay [the maximum for "defined contribution" plans]. Because benefit accrual tends to reward long-term service, and because with older employees there is less time for assets to accumulate to fund the benefit, contributions for older employees generally are much higher than younger employees. Thus, older business owners, seeking large contributions often favor defined benefit plans. For aging management groups who have little chance to save for retirement, a defined benefit plan is an excellent way to make up for lost time. A defined benefit plan provides the only way for companies to make annual tax-deductible contributions for their employees in excess of $40,000 or 100% of pay [the maximum for "defined contribution" plans]. However, because of the required funding costs, and potential growing funding liability for older employees, the number of defined benefit plans has dropped over the past decade. As the baby boom of employees is growing older and becoming more transitory in employment, larger employers have steered away from defined benefit plans to employee participatory plans such as 401(k) plans. Back to 401k / 403b / 457b - Pension Plans LEGAL NOTICES
Global Finanical Services Group
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