Analysis: MAXWELL PHIRI
THE defined benefit plan is a type of retirement plan that has been around for many years. If you are working for a company that provides a
defined benefit plan, you will need to understand what to expect. Here are some of the advantages and disadvantages of a defined benefit plan.
One of the major advantages of a defined benefit plan is that there is no effort required on your part. The company that provides the defined benefit plan is in charge of contributing to it and making the individual investment decisions. You will simply have to do your job, and then your retirement benefits will be waiting for you when you retire.
Another benefit is that you do not have to decide how much to contribute to the plan. The business is going to handle this aspect for you, and you will still receive your full pay.
One of the disadvantages of this type of plan is that you do not have a say over how the money is invested. Someone else is handling all of these decisions for you.
Another disadvantage of this type of plan is that it has limited potential. You know exactly how much you are going to receive when you retire.
The growth of the fund is at a snail’s pace considering that all decision are made by the employer
It is locked and you cannot think outside the silos in terms of investment opportunities
Merits, demerits of defined contributory schemes
There have been a few major problems with defined contribution plans:
The funds offered to employees have high expenses leading to inadequate returns;
Employees have chosen very unsatisfactory portfolio weightings (particularly shares of their employer, which is disastrous if the firm fails);
The worker has no clear idea how large a contribution is needed to meet a target retirement income.
However, the defined contributory schemes come with a number of benefits to both the employee and employer.
One of the biggest advantages of using a defined contribution plan is that you have more control over the process. You can decide how much you want to set aside for your retirement and you can also make decisions about the investments. With this type of plan, you get to choose what types of investments you put your money into. You decide when to buy and sell shares and how risky you want to be. With a defined benefit plan, you do not have any control over what happens to your money. A pension manager will be in charge of the funds and they will choose the investments for everyone.
Another advantage of putting money into this type of retirement plan is that it is portable. This means that you can easily take the money with you when you move to another company or become self-employed. If you start up with another employer, you can easily roll the funds into that account and continue saving for retirement. This makes it a much simpler process than when you are a part of a defined benefit plan.
With a defined contribution plan, you will also be able to get benefits that are equal for everyone. With a defined benefit plan, this may not be the case. The vesting requirements of a defined benefit plan are generally much more difficult than those of a defined contribution plan. With a defined contribution plan, you will be able to gain access to the benefits much sooner. As soon as you are eligible to start contributing to the plan, you can start saving for your retirement.
With a defined contribution plan, you can potentially have more money available for you during retirement. When you put money into a defined contribution plan, you can choose the investments for yourself, and if they perform well, you will be rewarded. With a defined benefit plan, you have a ceiling on what you can get for retirement. Everyone receives a certain amount of money for a certain number of years of service for the company. If the retirement benefits are not that high, it can be disheartening because you know exactly how much you are going to get upon retirement.
The author is a human resources practitioner and pension advisor.