Defined Benefit Plan

Under this type of plan, the employer promises that upon retirement the employee will receive a defined or known monthly income for the duration of his/her lifetime. The monthly benefit that the employee will receive will be based upon a specific formula, which can be found in the plan documents, and usually includes his/her years of service with the company and his/her salary at the time of retirement. This benefit is referred to as the employee’s "Accrued Benefit". It is possible to determine an employee’s accrued benefit at any point in time. Under this type of plan the accrued benefit earned as of a specific date and payable over the lifetime of the employee is reduced to a present day lump sum value.

Almost all defined contribution plans include words like "401(k) Plan," "Savings Plan," "Thrift-Savings Plan," or "Profit-Sharing Plan." Under this type of plan, the employer and/or employee contributes a specific amount per year to the plan. However, the plan does not specify the amount of the benefit the employee will receive upon retirement. Individual record keeping accounts are maintained for each employee’s contributions, interest and investment gains or losses. The employee can usually direct how his/her account is invested. The present value of a defined contribution plan would be the account balance as of any point in time reduced, if applicable, for a marital coverture fraction and for non-vesting.

Under this type of plan the employee receives pension credits each year, which are based upon a set percentage of his/her annual income. This continues each year until the employee retires or terminates employment. Additionally, the employee’s cash balance account is credited with annual investment earnings that are set by the plan at a specified annual rate of return. The employee has no say in how the account is invested because the money earmarked for each employee is not actually segregated from the money earmarked for all other employees but rather it is maintained in a general pension fund. Because of the predetermined nature of the plan it is considered to be a defined benefit pension plan. The present value of a Cash Balance Pension Plan would be the account balance as of any point in time reduced, if applicable, for a marital coverture fraction and for non-vesting.

Under this type of plan, the individual contributes a dollar amount per year to the plan. Individual record keeping is maintained for contributions, interest and investment gains or losses. The present value of a IRA would be the account balance as of any point in time reduced, if applicable, for a marital coverture fraction.

Under this type of plan, the employer and/or employee contributes a specific amount per year to the plan. However, the plan does not specify the amount of the benefit the employee will receive upon retirement. Individual record keeping accounts are maintained for each employees contributions, interest and investment gains or losses. The employee can usually direct how his/her account is invested. The present value of this type of defined contribution plan would be the account balance as of any point in time reduced, if applicable, for a marital coverture fraction and for non-vesting.

This type of plan is a defined benefit plan even though it has most of the attributes of a defined contribution plan. This type of plan is unusual for a defined benefit plan because it maintains individual account balances for all employees. The funding of the plan is based upon a contribution formula that guarantees a predetermined and specific amount of contributions each year. Individual record keeping accounts are maintained for each employees contributions, interest and investment gains or losses. The present value of a Money Purchase Plan would be the account balance as of any point in time reduced, if applicable, for a marital coverture fraction and for non-vesting.