Financial Education

Hybrid retirement plans such as cash balance plans are an attempt to combine the best benefits of traditional defined benefit and defined contribution plans. They combine the portability of assets, ease of administration and understandability for participants of a defined contribution plan with the benefit guarantees, link between benefit and years of service, and ability to link retirement income to a percentage of salary found in a defined benefit plan.

In most hybrid plans, the employer bears investment risk as with a defined benefit plan. The employee receives a statement outlining individual ownership as with a defined contribution plan.

Another common employee benefit is a stock ownership plan (ESOP), which encourages employees to take an ownership stake in their employer. Regulations of such plans vary from country to country, with some requiring employee contributions and others prohibiting them. Shares may or may not be offered to employees at a discount to their market value. In any case, employees participating in an ESOP need to pay special attention to the overall diversification of their investments. This is particularly important in an ESOP because the employee has both human and financial capital at stake in the company.

For more information, see all articles on: FInancial Planning, Portfolio Management

See also:

Pensions: Defined Benefit versus Defined Contribution

Vested Benefit Obligation (VBO)

Defined Benefit versus Defined Contribution Plans

Pension Obligation Assumptions

Risk Tolerance for Defined Benefit Retirement Plans