FIN
Module 1 - An Overview of Retirement Planning.docx

Comparison of db vs dc plans in a db plan the benefit

Info icon This preview shows pages 16–19. Sign up to view the full content.

Comparison of DB vs. DC Plans In a DB plan, the benefit is specified, while in a DC plan, it is the contribution or the contribution match that is specified. Benefits earned within a DB plan can be heavily weighted towards an employee’s final salary, while DC employees contribute throughout their career and their benefits have nothing to do with final salary. Employees with a DC plan always know what is being contributed, but the ultimate benefit is at the mercy of their own investment selections over time. In a straight DB plan, the plan assets are allocated to one master account and not to individual participants (employees). In contrast, each participant has their own uniquely identified account in a DC plan. In a DB plan, all investment risk is born by the employer. They must provide a specific benefit and if the plan assets take a substantial hit in the stock market, then the employer must make up the shortfall out of operating income. In a DC plan, all investment risk is born by the participant. The company’s only obligation is to contribute any matching dollar amounts, which are not adjusted for inflation. If the participant chooses investments that appreciate substantially, then they will benefit, but they also will directly feel the pain of any losses. From the employer’s perspective, a DB plan has very unpredictable costs. If the investments decline in value, then they may need to incur a substantial unplanned expense. The employer must weigh the reality of these costs with their desire to provide certain benefits for their employees. On the other
Image of page 16

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

hand, the DC plans have very predictable costs for the employer. They will pay their matching contribution plus any administrative costs. The administrative costs for a DB plan are significantly higher than for a DC plan. There is simply more work that needs to be done in checking compliance, calculating actuary assumptions, and determining employer contribution levels. As mentioned earlier, a DB plan allows for past service to increase an employee’s ultimate benefit, while a DC plan does not. A DB plan is not portable, which means that the employee’s share of the plan assets cannot be transferred into a separate account if the employee leaves the company. A DC plan, as you will learn, can be transferred to various types of retirement accounts if an employee severs employment. This graph from Towers Watson illustrates the percentage of Fortune 500 companies offering defined benefit and defined coverage plans and visually confirms that employers, in practice, are decreasing their use of DB plans and increasing their use of DC plans. Introduction to Regulatory Overwatch
Image of page 17
Regulation can add a great deal of complexity to any system. The world of employer-sponsored retirement plans is no different. The good news is that the presence of regulation means that employees are theoretically safer and that consultants who thoroughly understand the regulation can benefit from their knowledge.
Image of page 18

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

Image of page 19
This is the end of the preview. Sign up to access the rest of the document.
  • Spring '14
  • VOSS,JAMESA
  • ERISA

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern