Feature

Defined Benefit (DB) Plan

Defined Contribution (DC) Plan

Guaranteed Benefit

Benefit is guaranteed for life regardless of employer contributions and investment earnings.

Benefit depends on employer and employee contributions, employee investment choices and earnings.

Benefit has a relationship to standard of living

Formula is typically based on highest average wage earned before retirement.

Contribution rate is typically based on current wages, but retirement not related to income.

Investment Risk

Risk is shared by employers

Risk is borne solely by the employee.

Professional Management

DB plans have resources to hire professionals to manage fund on behalf of all plan participants.

DC plan participants must act as their own investment decision maker or pay for such service.

Access to Information

Professional administrators have access and knowledge to investment information.

Plan participants may not know what investment information exists or how to use it.

Rate of Return

Average rate of return in a DB plan is typically higher than in a DC plan.

Most employees investments in DC plans under perform compared to DB plan investments.

Negotiating Power

DB plans have high buyer power due to their size and resources and can negotiate low administrative fees, brokerage and custodial fees.

DC plans have very low negotiating power due to small size of individual employee plans.

Vesting

Typically 5-10 years; Vested benefit is frozen for job leavers.

Can be immediate, varies by plan

Portability

Within the state only, although employees can withdraw their contributions and purchase prior non-vested service or service from other plans.

Vested account balance is fully portable.

Disability Pension

DB plans often have a disability pension. This is especially helpful to young workers.

DC plans do not offer disability pensions. Disabled workers are eligible for vested lump sum payment.

Cost of Living Adjustment (COLA)

Many DB plans have COLA adjustments, typically limited to 3% per year.

Not available in DC plans

Retirement Planning

A known and guaranteed benefit simplifies retirement planning.

Without a known benefit, retirement planning can be complex.

Death Benefit

Upon death, DB plans typically offer guaranteed benefits for spouse of vested employee.

Limited to lump sum payment of account balance at death.

Rewards Loyalty

Long term employees are rewarded with superior pension benefits.

DC plans do not favor long term employees.

Diversification

Pooling of contributions permits diversification by asset class and individual asset.

Relatively small nature of individual employee contributions limit ability to diversity and lack of employee knowledge

Cost of Administration

Borne by fund earnings and/or employer

Employee paid

Employee Investment Expertise

Not needed to meet retirement income needs.

Employee must become an able investor to meet retirement income needs.