- Retirement plan
A retirement plan is an arrangement to provide people with an income, or
pension, during retirement, when they are no longer earning a steady income from employment. Retirement plans may be set up by employers, insurance companies, the government or other institutions such as employer associations or trade unions. Retirement plans are more commonly known as pension schemes in the UK and Ireland and superannuation plans in Australia.
Types of retirement plans
Retirement plans may be classified as "defined benefit" or "defined contribution" according to how the benefits are determined. A defined benefit plan guarantees a certain payout at retirement, according to a fixed formula which usually depends on the member's salary and the number of years' membership in the plan. A defined contribution plan will provide a payout at retirement that is dependent upon the amount of money contributed and the performance of the investment vehicles utilized.
Some types of retirement plans, such as "cash balance" plans, combine features of both defined benefit and defined contribution plans. They are often referred to as "hybrid" plans.
Defined contribution plans
In a defined contribution plan, contributions are paid into an individual account for each member. The contributions are invested, for example in the stock market, and the returns on the investment (which may be positive or negative) are credited to the individual's account. On retirement, the member's account is used to provide retirement benefits, often through the purchase of an annuity which provides a regular income. Defined contribution plans have become more widespread all over the world in recent years, and are now the dominant form of plan in the private sector in many countries. For example, the number of DB plans in the US has been steadily declining, as more and more employers see the large pension contributions as a large expense that they can avoid by disbanding the plan and instead offering a defined contribution plan.
Examples of defined contribution plans in the USA include
Individual Retirement Accounts (IRAs) and 401(k) plans. In such plans, the employee is responsible, to one degree or another, for selecting the types of investments toward which the funds in the retirement plan are allocated. This may range from choosing one of a small number of pre-determined mutual funds to selecting individual stocks or other securities. Most self-directed retirement plans are characterized by certain tax advantages, and some provide for a portion of the employee's contributions to be matched by the employer. In exchange, the funds in such plans may not be withdrawn by the investor prior to reaching a certain age.
Defined benefit plans
Traditionally, retirement plans have been administered by institutions which exist specifically for that purpose, by large businesses, or, for
governmentworkers, by the government itself. A traditional form of defined benefit plan is the "final salary" plan, under which the pension paid is equal to the number of years worked, multiplied by the member's salary at retirement, multiplied by a factor known as the "accrual rate".
The final accrued amount is available as a monthly pension or a lump sum.
In addition, many countries offer state-sponsored retirement benefits, beyond those provided by employers, which are funded by payroll or other
taxes. In the U.S., this is one role of Social Security.
Defined benefit plans may be either "funded" or "unfunded". In a funded plan, contributions from the employer, and sometimes also from plan members, are invested in a fund towards meeting the benefits. The future returns on the investments, and the future benefits to be paid, are not known in advance, so there is no guarantee that a given level of contributions will be enough to meet the benefits. Typically, the contributions to be paid are regularly reviewed in a valuation of the plan's assets and liabilities, carried out by an
actuary. In many countries, such as the USA, the UK and Australia, most private defined benefit plans are funded, because governments there provide tax incentives to funded plans.
In an unfunded plan, no funds are set aside. The benefits to be paid are met immediately by contributions to the plan. Most government run retirement plans, such as the social security system in the USA and most European countries, are unfunded, with benefits being paid directly out of current taxes and social security contributions. In some countries, such as Germany, Austria and Sweden, company run retirement plans are often unfunded.
cash balance planis a defined benefit plan made by the employer, with the help (some critics say the connivance) of consulting actuaries(like Kwasha Lipton, whom it is said created the cash balance plan) to appear as if they were defined contribution plans. They have "notional balances" in hypothetical accounts where, typically, each year the plan administrator will contribute an amount equal to a certain percentage of each participant's salary; a second contribution, called "interest credit", is made as well. These are not actual contributions and further discussion is beyond the scope of this entry suffice it to say that there is currently much controversy. Target Benefit plans are defined contribution plans made to match (or look like) defined benefit plans. This would only work if all actuarial assumptions are actually realized.
Contrasting types of retirement plans
Advocates of defined contribution plans point out that each employee has the ability to tailor the investment portfolio to his or her individual needs and financial situation, including the choice of how much to contribute, if anything at all. However, others state that these apparent advantages could also hinder some workers who might not possess the financial savvy to choose the correct investment vehicles or have the discipline to voluntarily contribute money to retirement accounts. This debate parallels the discussion currently going on in the U.S., where many Republican leaders favor transforming the Social Security system, at least in part, to a self-directed investment plan.
Fee-only financial advisor
Retirement plans in the United States
UK Pension Provision
Superannuation in Australia
Individual Pension Plan(IPP)
Individual Retirement Account(IRA)
* [http://articles.moneycentral.msn.com/retirementandwills/createaplan/createaplan.aspx Creating a Retirement Plan] Articles on MSN Money
Wikimedia Foundation. 2010.
Look at other dictionaries:
retirement plan — UK US noun [C] US HR, FINANCE ► PENSION PLAN(Cf. ↑pension plan): »Premature withdrawals from retirement plans may have adverse tax consequences. »What s your company retirement plan worth right now? … Financial and business terms
retirement plan — n. A financial package that is payable to an employee after retirement, such as a pension or 401(k) plan. The Essential Law Dictionary. Sphinx Publishing, An imprint of Sourcebooks, Inc. Amy Hackney Blackwell. 2008 … Law dictionary
retirement plan — noun a plan for setting aside money to be spent after retirement • Syn: ↑pension plan, ↑pension account, ↑retirement savings plan, ↑retirement savings account, ↑retirement account, ↑retirement program • Hypernyms: ↑ … Useful english dictionary
retirement plan — 1. a systematic plan made and kept by an individual for setting aside income for his or her future retirement. 2. See pension plan (def. 1). * * * … Universalium
retirement plan — re tirement ,plan noun count AMERICAN a system by which you save money from your pay for your RETIREMENT … Usage of the words and phrases in modern English
retirement plan — noun (C) AmE a system for saving money for your retirement, especially if you will not receive money from your employer compare pension plan … Longman dictionary of contemporary English
retirement plan — re tirement .plan n AmE a system for saving money for when you stop work, done either through your employer or arranged by you … Dictionary of contemporary English
French special retirement plan — In France employees of some government owned corporations enjoy a special retirement plan, collectively known as régimes spéciaux de retraite . These professions include employees of the SNCF (national railways), the RATP (Parisian transport),… … Wikipedia
qualified retirement plan — A retirement plan that meets certain requirements under the Internal Revenue Code and is thus eligible for special tax considerations and benefits. Often, the plan allows employers to make tax deductible contributions on behalf of eligible… … Law dictionary
qualified retirement plan — A retirement plan established by employers for their employees that meets the requirements of Internal Revenue Code Section 401( a) or 403( a) and is eligible for special tax considerations. The plan may provide for employer contributions, as in… … Financial and business terms