Pension Plans in the U.S.
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Until the late 1800s, employees provided their services to their employers for a fixed wage with little or no other available compensation. Retirement planning was a mixture of savings and dependence on younger family members. By the end of the nineteenth century, that situation was changing. Railroads, banks and utilities began to provide retirement benefits to employees who had worked for the companies for a number of years, and employees began to consider those benefits as part of a larger compensation package. Initially, most employers set up defined benefit plans; the latter half of this century has seen the rise of defined contribution plans, as well. By 1987, more than 40 million American workers were covered by more than 232,000 defined benefit plans with assets of almost 900 billion dollars (Seburn, 16). This research examines the two prominent types of pension plans in the United States today (defined benefit and defined contribution), examining the advantages and disadvantages of each and why some employers are replacing defined benefit programs with defined contribution programs.Defined benefit programs provide former employees with a predefined distribution, generally paid out on a monthly basis. Typically, this amount is calculated as a percentage of average salary over some period of time coupled with a factor taking into account the amount of time the employee worked for the company. There are often age requirements which also affect the amount or pe
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ans, defined contribution plans use the employees' funds, not the employers'. Employees set aside some amount of their earnings which the company (or an agent acting on behalf of the company) then invests. Some contribution plans guarantee a rate of return; others do not. Most contribution plans enable the participants to determine which types of investment programs they want to participate in (high-risk high-return, low-risk guaranteed return and so on). In companies where there is a guaranteed rate of return, companies may be responsible for making up any discrepancies between the invested value of the funds and the guaranteed value (Geisel, 3). Employers may also choose to match employee contributions up to a certain level; these matches may be based on salary percentages or a given dollar amount.
Defined contribution plans do not typically have length of services requirements associated with them; employees are vested in the plans from the first date of participation or shortly thereafter (Chassen, 18). Unlike defined benefit plans, where an employee receives distribution only when the requisite retirement age is reached, defined contribution programs are distributed to employees upon separation from the company (either
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Approximate Word count = 1502
Approximate Pages = 6 (250 words per page)
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