Pros and Cons of a Defined Benefit Pension Plan

A defined benefit pension plan is a pension plan that will provide a retiree with a specific amount of retirement benefits based on the number of years of service that they have provided their company. This is different from a defined contribution plan such as the 401k in which an individual makes specific contributions to the plan and the amount of benefits in the future are unknown. Here are a few of the pros and cons of a defined benefit pension plan. 

Pros

One of the biggest advantages of a defined benefit pension plan is security. With this type of retirement plan, you know exactly how much money you are going to get when you retire. When you utilize a 401(k) or an IRA, there is a level of uncertainty associated with it. You really do not have any idea how your investments will perform and there is a chance that the market could be down when you try to retire. With a defined benefit plan, it does not matter how the market is performing, your retirement will be waiting on you when you are ready to retire.

Something else that provides safety for individuals who are covered by a defined benefit plan is the Pension Benefit Guaranty Corporation. This is a government agency that is in charge of regulating many defined benefit plans. With this type of insurance, companies have to pay a certain amount of money for each pension that they have every year. If something happens to the company, the PBGC will step in and cover everyone's pension for them.

Another advantage of this type of retirement plan is that you know exactly how long you need to work in order to retire. With these types of plans, you get a certain amount of money for every year that you provide service to the company. With other types of retirement plans, it is basically a guessing game. You have to wait until you reach the age of 59 1/2, but after that, you are not sure when you should retire.

Cons

One of the disadvantages of having access to a defined benefit pension plan is that you may not be able to make as much money as you would have been able to if you use a defined contribution plan. With a 401(k), you would be able to choose the individual investments that you put your money into. This allows you to potentially make a higher annual return and you might be able to have a much more comfortable retirement as a result.

Another potential disadvantage of defined benefit pension plans is that you do not have any control over your investments. While some people like not having to worry about watching their investments, other people like to have a certain level of control over them. With defined benefit pension plans, you do not get to choose where your money goes which can be a problem for certain types of investors. Some people like the feeling of control that comes with getting to choose your own investments and sell them when you want.

blog comments powered by Disqus