Mid-America Pension Rights Project: Defined Benefit Pension vs Defined Contribution 401(k): Part 1

By Christine Steinmetz, Pension Attorney at the Mid-America Pension Rights Project at Elder Law of Michigan

Do you ever wonder if you have saved enough for retirement? There are so many online calculators, articles, and books written on this very issue. You save and expect your retirement to go smoothly. However, many people retire and realize that they have not saved enough.

Recently, General Electric decided to stop offering defined benefit pension plans to its workers. Like many companies today, defined benefit pension plans are no longer being offered. Workers are forced to save for retirement in a 401(k). This blog post discusses the differences between a defined benefit pension plan versus a defined contribution 401(k) plan and who bears the costs and risk.

First, let’s talk about a defined benefit pension plan. Today, if you are one of the few who has a defined benefit pension, then consider yourself lucky. Fewer businesses offer defined benefit pensions to its workers, and those that do offer defined benefit pension plans are looking to stop offering them.

So, what is a defined benefit pension plan? A defined benefit pension plan is where the employer funds the entire retirement benefit for the worker. Now, the worker will need to meet certain requirements to be eligible for the pension benefit, such as age, hours worked, and length of time on the job, etc. However, if the worker meets these requirements, then the employer promises to pay the worker a monthly pension benefit in retirement.

With a defined benefit pension, the worker does not have to contribute to the pension plan and is guaranteed a monthly amount at retirement. The employer, and not the employee, bears all the cost and risk to make sure the pension benefit is paid. So, if the employer has the retirement funds in the stock market and the market drops, the employer bears the risk. The worker is still paid their full pension benefit each month.

In our next post, I will discuss the defined contribution plan and the risk involved with it.

If you have questions about your 401(k) or defined benefit pension plan, please call the Mid-America Pension Rights Project. The Mid-America Pension Rights Project is funded by the Federal government through a grant provided by the Administration for Community Living, and is a program of Elder Law of Michigan, Inc., a 501(c)(3) non-profit organization.

Since the program began in 1998, the Pension Project has assisted over 14,000 clients and recovered over 69 million dollars in pension benefits. The Pension Project assists clients that either worked in or are currently living in Indiana, Kentucky, Michigan, Ohio, Pennsylvania, and Tennessee. For more information, visit http://www.mid-americapensions.org.

If you need help with or information about your pension or 401(k) benefit, please call the Mid-America Pension Rights Project at 866-735-7737 to schedule an appointment with one of our experienced attorneys.

The information in this article is general and not intended to be a substitute for legal advice. In any legal matter you should always consider consulting with an attorney for specific advice.

Christine Steinmetz is a part-time Attorney at Elder Law of Michigan and has been a member of the Elder Law team since 2011. As an attorney at Elder Law, Christine advises clients on issues regarding pension benefits.