Pensions: Defined Benefit versus Defined Contribution
There are two general types of pension plans (with many variations of each.) These are the defined benefit plan and the defined contribution plan.
Defined Contribution plans are those like 401(k) plans, in which the employer agrees to contribute a specific amount to the employee’s retirement fund. These plans belong to the employee, who does not lose the benefit (though there are often vesting requirements of three to five years) upon changing jobs. In addition, any risk (benefit) from the plan assets performing unexpectedly poorly (well) is borne by the employee.
Defined Benefit plans are the traditional pension, under which the employer promises to pay a pre-determined amount (usually a percentage of salary) each month during retirement. In this case, the risk associated with funding the obligation, which can occur far in the future, are borne by the employer.
For more information, see all articles on: Adjusting Reported Financial Statements, Financial Statement Analysis, Fundamental Analysis, Investing in Stocks, Ratio Analysis, Valuation See also:
The Intelligent Investor: The Classic Text on Value Investing
Financial Statement Analysis: A Practitioner's Guide, 3rd Edition
Managing Investment Portfolios: A Dynamic Process (CFA Institute Investment Series)
[...] Pensions – froze pension plan. The 8% discount rate and maximum 70% equity allocation implies an expected return on equity investments of at least 9.3%, which under current market conditions is probably aggressive. [...]
April 11th, 2007 at 1:31 pm