Most retirement plans fall into one of two major categories:
Defined benefit plans
Commonly known as pension plans, defined benefit plans require employers to pay a fixed annual amount to eligible employees during their retirement years. They allow employers a high degree of tax savings, and in good times, favorable growth rates can reduce or eliminate the employer’s contribution. However, they can be costly to administer and may require higher contributions in times of poor or negative investment returns. Because of the high costs to employers, defined benefit plans are few and far between today. The trend has been toward defined contribution plans, where employees assume a much greater responsibility for contributing to their retirement savings.
Defined Contribution plans
These plans allow employers and employees to contribute a set amount or percentage of pay, and retirement benefits are based on the actual performance of the funds. These plans give the employer better cost control as the contribution is defined. The amount an employee can contribute is based on a percentage of their salary up to a maximum amount defined by law. Defined contribution plans can take many forms, including: