Choosing a Pension Plan, Essay Example

There are many different types of retirement pension plans available in today’s complex financial marketplace.  There are however three popular plan types used by many private and public organizations; the defined benefit plan, the defined contribution plan, and the cash balance pension plan.

The defined benefit plan returns a specified monthly retirement return that is always consistent.  The amount of return is usually based on several factors such as the employee’s salary, time with the company and age.  It is not dependent on market fluctuations.

Defined contribution plans are based on a guaranteed value of annual contributions by the employer.  In some cases, the employee may also contribute.  The retirement return is not certain since it is based on the investment earnings over the life of the plan.  The employer contributions to the account are guaranteed, but not the future benefits.

A cash balance pension plan is a type of defined benefit plan where the employee is protected from investment losses but is also not entitled to investment benefits.  The employer carries this risk, but the employee is guaranteed a set amount based on the overall contributions to his or her individual account.  The return is not based on tenure or earnings.

Considering the wild fluctuations in the stock and money markets in the past, it makes sense for a young person just entering the workforce to gravitate toward a defined benefit plan.  These plans may not produce a return commensurate with an aggressive market-based plan, but at least a steady income can be expected.  It is generally true that the older a person is before investing in retirement, the more risk he or she has to take to net an adequate nest egg.  If a young person starts a low-risk retirement strategy early in life, he or she will be better positioned for a secure retirement.