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This retirement booklet comes from the U.S Department of Labor and the Employee Benefits Benefits and Security Administration
Snippet from chapter 1 of the retirement booklet
The first step to understanding your retirement benefts is to fnd out what kind of retirement plan your employer has. There are two major types of plans, defned beneft and defned contribution, which are described here and outlined in Table 1 on page 4. Keep in mind that your employer may have more than one type of plan, and may have different participation requirements for each.
A defined benefit plan, funded by the employer, promises you a specifc monthly beneft at retirement. The plan may state this promised beneft as an exact dollar amount, such as $100 per month at retirement. Or, more often, it may calculate your beneft through a formula that includes factors such as your salary, your age, and the number of years you worked at the company. For example, your pension beneft might be equal to 1 percent of your average salary for the last 5 years of employment times your total years of service.
A defined contribution plan, on the other hand, does not promise you a specifc beneft at retirement. Instead, you and/or your employer contribute money to your individual account in the plan. In many cases, you are responsible for choosing how these contributions are invested, and deciding how much to contribute from your paycheck through pretax deductions. Your employer may add to your account, in some cases by matching a certain percentage of your contributions. The value of your account depends on how much is contributed and how well the investments perform. At retirement, you receive the balance in your account, refecting the contributions, investment gains or losses, and any fees charged against your account. The 401(k) plan is a popular type of defned contribution plan. There are four types of 401(k) plans: traditional 401(k), safe harbor 401(k), SIMPLE 401(k), and automatic enrollment 401(k) plans. The SIMPLE IRA plan, SEP, employee stock ownership plan (ESOP), and proft sharing plan are other examples of defned contribution plans.
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