Question 20-2 - plan the employer’s obligation is simply...

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Differentiate between a defined contribution pension plan and a defined benefit pension plan.  Explain how the employer's obligation differs between the two types of plans. A defined contribution plan specifies the employer’s contribution to the plan usually based on a  formula, which may consider such factors as age, length of service, employer’s  profit, or compensation levels.  A defined benefit plan specifies a determinable pension benefit  that the employee will receive at a time in the future.  The employer must determine the amount  that should be contributed now to provide for the future promised benefits.  In a defined contribution 
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Unformatted text preview: plan, the employer’s obligation is simply to make a contribution to the plan each year based on the plan formula. The benefit of gain or risk of loss from assets contributed to the plan is borne by the employee. In a defined benefit plan, the employer’s obligation is to make sufficient contributions each year to provide for the promised future benefits. Therefore, the employer is at risk to the extent that contributions will not be adequate to meet the promised benefits....
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