Defined benefit plans and defined contribution plans: Purposes for each

Defined benefit and defined contribution plans serve different purposes, and are often used to meet different needs -- both from the perspective of the employer and the participant.

A defined benefit plan provides "secure" and adequate retirement incomes for persons who have had long careers with a single employer. The typical defined benefit plan formula rewards a long service employee with a formula that slowly accumulates guaranteed retirement income, typically payable in monthly installments over the participant's post-termination years after the participant's death, and over the participant's surviving spouse's life expectancy. Defined benefit plans are viewed as providing a high degree of retirement income security, for the following reasons: First, a participant is promised a certain level of benefits, based on average wages and years of service, and second, a participant's benefit is "guaranteed," by the plan assets and by a Federal agency, the Pension Benefit Guaranty Corporation, against losses due to the employer's insolvency.

A defined contribution plan has played an historic role as a secondary plan, supplementing the income provided through a defined benefit plan. However, a defined contribution plan has become increasingly popular over the past 10 to 15 years due to several factors, including the changing composition of the work force, the decline of union membership and of the manufacturing industry, and the growing complexity and increasing expense of maintaining defined benefit plans.