A defined contribution retirement plan is one in which the employer and/or employee regularly make contributions to the retirement fund on a regular basis, while a defined benefit retirement plan gives pension to retired employees based on the years of service and salary. Some people prefer the defined contribution retirement plan because the funds in this type of plan are guaranteed although there is potential for future benefits through investment. Others prefer the defined benefit retirement plan because the risk involved here is mostly borne by the employer because the employer must come up with ways to compensate for any additional benefits accrued by the employee.
The kind of individual that would prefer a defined contribution retirement plan typically works for a smaller company. Since the employer is responsible for making up the difference in the defined benefit retirement plan, the employee of a smaller firm would not be completely confident that their company would be able to make up the difference owed to them; therefore, they would rather be reassured knowing that them and/or their employer is regularly putting money into the retirement fund. On the other hand, employees of big companies prefer the defined benefit retirement plan because a set amount of money is guaranteed by the employer and they have potential for making a higher pension if they are able to meet certain requirements while they are working. Pensions are guaranteed even if the organization goes out of existence or runs out of money; these rights are protected by the Pension Benefit Guaranty Corporation (PBGC).
Ultimately, the defined benefit plan is more ideal because it is guaranteed and can provide the retired employee with more money; this protection is extended even if the paying company goes out of business. To ensure that an organization is able to balance its commitments to its employees with affordable financial and strategic decisions, it needs to have a good budget that ensures it will be able to satisfy all of its responsibilities.
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