Defined Benefit and Contribution Pension Plans

Differences along with advantages and disadvantages of both

  • A defined contribution plan provides an individual account for each participant. The benefits are based on the amount contributed and are also affected by income, expenses, gains and loses.
  • A defined benefit plan promises the participant a specific monthly benefit at retirement and may state this as an exact amount. Monthly benefits are calculated through a formula that considers a participants salary and service. Unlike defined contribution plans, the participant is not required to make investment decisions. A defined benefit plan is sometimes referred to as a fully funded pension plan.

Advantages of Defined Benefit Plans

  • Guaranteed retirement income security for workers
  • No investment risk to participants
  • Cost of living adjustments
  • Not dependant on the participant’s ability to save

Disadvantages of Defined Benefit Plans

  • Difficult to understand by participant

Advantages of Defined Contribution Plans

  • Participants have a certain degree of how much they choose to save
  • Can be funded through payroll deductions
  • Participants can benefit from good investment results
  • Easily understood by participants

Disadvantages of Defined Contribution Plans

  • Difficult to build a fund for those who enter late in life
  • Participants bear investment risk

We from Doorneweerd Assurantien have the skills and knowledge to inform you what may be the best for you or your company when providing a pensionplan to your Dutch employees.