Explaining Defined Benefit Plans, Part 1 - What is a Defined Benefit Retirement Plan

Описание: This video discusses defined benefit retirement plans, which are offered by employers and provide specific retirement benefits based on factors like age, salary, and years of service. These plans are less common in the private sector now, with many companies shifting to defined contribution plans like 401k. Defined benefit plans are now primarily found in the public sector. They provide guaranteed retirement payments unaffected by market performance and incentivize employee retention. The video also mentions the potential phasing out of defined benefit plans and the shift in responsibility from employers to employees.

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Voiceover:
Welcome to part one of our “Defined Benefit Plan” insight videos! Do you know what a defined benefit plan is? Do you have a defined benefit plan? Let’s take a look into what all a defined benefit plan entails.
In short, a defined benefit plan is a retirement plan put in place by your employer. Your employer provides you with guaranteed retirement benefits based on a set formula. These plans, often referred to as Pension Plans, have become less and less common over the last few decades.
This decline is especially pronounced in the private sector, where more and more employers have shifted to “defined contribution plans” for example, a 401k. While there are still employers offering defined benefit plans, they mostly exist in the public sector. Now, let’s get a better understanding of what a defined benefit plan is.
In a defined benefit plan, a company takes charge of its employee’s retirement income. They use a formula based on each employee’s salary, age, and time with the company. An employer will pay into and manage the employee’s retirement plan. Once in retirement, the employee will receive payments from the company’s retirement plan, and this payment is regardless of how the markets perform, which makes the benefits defined. The company bears the risk of fluctuations in the stock market, meaning that the employees do not have to stress about any decreases in their retirement payments.
Curious as to why a company would do something like this for their employees? Well, decades ago a company could reasonably expect many of its employees to stick around for the duration of their careers. In turn, a pension that increased in value the longer you stuck around, made it more beneficial for the employees to stick around.
In 1978, the 401k plan came to be, but they didn’t catch on until several years later. Nowadays, having a generous 401(k) with a high employer match is the new gold standard for employees.
In addition, more and more workers are hopping from job to job every few years rather than staying for the long haul. This has led to the shift in responsibility from employers to employees.
Many of today’s remaining defined benefit plans have been “frozen.”
This means the company is phasing out its retirement plan, though it’s waiting to do so until the enrollees surpass the age requirement. In a “soft freeze,” no new employees can join the plan, but workers already participating in it continue to accrue benefits. In a “hard freeze,” a company closes the plan to new employees and freezes benefit accrual, too.
Thank you for joining us for this short video and remember to join us in part two of continued education on Defined Benefits Plans!

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