The Nuts and Bolts of Defined Benefit Plans
3rd Jan 2024
- How Defined Benefit plans work
- Different options for DB plans
- The advantages and how they compare to Defined Contribution plans
Defined Benefit (DB) plans have a long history. In recent years they have not been as common as Defined Contribution (DC) plans like 401(k)s. There are a number of benefits they offer that can provide a stable income during retirement years. In the recent Forbes article, Understanding Defined Benefit Plans, writer Kate Ashford, explores the advantages of Defined Benefit plans commonly referred to as pension plans.
One of the big selling points of Defined Benefit plans is the tax deferred investment growth and the deductions available for certain contributions. DB plans are largely employer funded which make them an ideal retirement option for high-income self-employed individuals or employers with a small number of employees. While employers get tax breaks for these plans they are also required to contribute a significant amount.
There are important differences between DB and DC plans. One is that Defined Benefit plans are protected with federal insurance by Pension Benefit Guarantee Corporation whereas Defined Contribution plans are dependent on investment performance.