PENSION PLANS
There are three basic types of registered employer-sponsored pension plans that are regulated by the government - Defined Benefit Plans, Defined Contribution Plans, and Hybrid Plans.
Defined Benefit Pension Plans: In a Defined Benefit (DB) Plan, the pension benefit the plan member receives at retirement is determined or "defined" by a formula that is usually based upon his/her age, length of service, and salary. Defined Benefit Plans may be entirely funded by employer contributions, or by both an employer and employee contribution. The employee contribution is fixed while the employer contribution will vary based on the actuarial assumptions which must be performed every three years to determine the plan liabilities. The benefit may or may not be indexed to increases in the cost of living.
Defined Contribution Pension Plans: In a Defined Contribution (DC) Plan, the contribution to the plan is "defined", not the benefit. There is no guarantee as to the amount of future benefits. The value of the Defined Contribution retirement income depends upon the accumulated contributions and the investment returns earned by these contributions. The plan member's contributions, the employer's contributions, and the investment earnings on these contributions are combined to purchase a life annuity contract or a life income fund that will pay the plan member his/her retirement income.
Hybrid Plans: In a Hybrid Plan some of the best features of Defined Benefit Plans and Defined Contribution Plans are combined which may reduce funding volatility and risk while providing better benefits. Hybrid Plans target a certain level of benefit payout that appears achievable. However, if the long-term investments don't perform as per expectations the target benefit payout may not be attainable and the benefit level is lowered in compensation. If the long-term investments return results that exceed the benefit payout target, the benefits can be increased.
Pension money is protected from creditors.
Contact the Blevins Team for more information.
