Defined benefit pension plans provide a fixed annuity benefit at retirement. Employers fund contributions to a qualified retirement trust. Participants receive a specific monthly retirement benefit based on compensation, years of service, or both. Generally, the benefit is payable for the lifetime of the participant with a monthly survivor benefit payable to the participant’s spouse upon death. Some defined benefit plans offer the participant the opportunity to have their monthly benefit converted into an actuarially equivalent lump sum distribution which may be rolled to an Individual Retirement Account upon retirement or termination.
Cash balance retirement plans are a relatively new form of defined benefit pension plan. These plans express the guaranteed plan benefit in the form of an account balance plan. From a plan participant’s point of view, little difference may be seen between a cash balance plan and a defined contribution type retirement plan. However, these plans offer tremendous planning opportunities for organizations with multiple principals with high contribution objectives, organizations which want to supplement their current defined contribution/401(k) plans with contributions in excess of the $51,000 contribution limitation (2013), and organizations which have the need to rapidly fund a retirement for employees within 10 to 15 years of retirement. An illustration of a combination 401(k)/profit sharing/cash balance plan can be found here.
Private employers who sponsor post-retirement medical plans are subject to financial reporting under SFAS 106. This requires disclosure of actuarial liabilities and annual cost determination on the employer’s financial statements. Government sponsors are subject to similar reporting requirements under GASB 74/75.
Defined contribution plans receive employer and employee contributions which are deposited to an account balance maintained in the employee’s name. The ultimate retirement benefit is subject to investment performance through the date which distributions begin. Generally, amounts in these accounts are rolled over to an Individual Retirement Account upon retirement and the employee self-manages these funds during retirement.