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RETIREMENT PLANS FAQ #1

1. Types Of Retirement Plans

The first step to understanding your retirement benefits is to find out what kind of retirement plan your
or your spouse's employer has. There are two major types of plans, defined benefit and defined
contribution. Keep in mind that the employer may have more than one type of plan, and may have
different participation requirements for each.

A defined benefit plan, funded by the employer, promises you a specific monthly benefit at
retirement. The plan may state this promised benefit as an exact dollar amount, such as $100 per
month at retirement. Or, more often, it may calculate your benefit through a formula that includes
factors such as your salary, your age, and the number of years you worked at the company. For
example, your pension benefit might be equal to 1 percent of your average salary for the last 5 years
of employment times your total years of service.

A defined contribution plan, on the other hand, does not promise you a specific benefit amount at
retirement. Instead, you and/or your employer contribute money to your individual account in the plan.
In many cases, you are responsible for choosing how these contributions are invested, and deciding
how much to contribute from your paycheck through pretax deductions. Your employer may add to
your account, in some cases by matching a certain percentage of your contributions. The value of
your account depends on how much is contributed and how well the investments perform. At
retirement, you receive the balance in your account, reflecting the contributions, investment gains or
losses, and any fees charged against your account. The 401(k) plan is a popular type of defined
contribution plan, and there are three types of 401(k) plans: traditional, SIMPLE 401(k), and Safe
Harbor 401(k) plans. The SIMPLE-IRA plan, SEP, employee stock ownership plan (ESOP), and
profit-sharing plan are other examples of defined contribution plans. (see Characteristics Of
Defined Benefit And Defined Contribution Plans)

Note

Employers can choose whether to offer a retirement plan to employees; Federal law does not require

employers to offer or to continue to offer a plan.

The Pension Benefit Guaranty Corporation (PBGC) guarantees payment of certain retirement benefits for

participants in most private defined benefit plans if the plan is terminated without enough money to pay all of

the

promised benefits. The government does not guarantee benefit payments for defined contribution plans.

For

more information, see the

PBGC’s Web site

Some hybrid plans – such as

cash balance plans

– contain features of both types of plans described above.