Q:

What is the difference between a defined benefit and a defined contribution plan?

A:

Quick Answer

An employer contributes capital to a fund under a defined benefit plan, whereas a defined contribution plan requires the individual, or employee, to contribute the capital, reports Time Money. Both plans serve as options to save for retirement.

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Full Answer

Defined benefit plans are more commonly known as pensions, states Time Money. The two common types of plans are traditional pensions and cash-balance plans. With each plan, an employee must meet certain work criteria in order to remain eligible. In some instances, employers require at least one year of active employment before employees become eligible. Moreover, there may be certain vesting requirements that can be unique for each employer. Employees can transfer balances to individual retirement accounts before retirement under a cash-balance plan; however this is not possible with traditional pensions.

A defined contribution plan requires an employee to contribute portions of a pay check to a fund, reports the Internal Revenue Service website. The employer can also contribute or match certain portions of an employee's contributions. The fund can then appreciate based on the investment gains or losses. Most funds also have associated investment fees. A retiree later receives distributions from the plan. Relevant taxes apply at the time of distribution from the fund.

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