The Defined Benefit Difference
Defined benefit vs. defined contribution
How does the defined benefit (DB) pension plan model compare against the defined contribution (DC) pension plan model?
Defined Benefit (DB)
- To provide members with lifetime retirement income.
- Typically, members and employers contribute a set percentage of the member's salary. Member and employer contributions are invested in a pension fund and used to pay the member's lifetime pensions.
- Professionals manage all investments based on strict guidelines established to protect plan members.
- Pension income is based on earnings and service in the plan — the more service, the bigger the pension will be.
- Once member start receiving their pension, they receive it for life.
- Many Death Benefit plans, offer additional benefits such as: a. Inflation protection b. Early retirement benefits c. Survivor Benefits d. disability benefits
Defined Contribution (DC)
- To help individuals accumulate retirement savings during their active career.
- Typically, individuals and employers contribute a set percentage of the individual's salary.
- Monies are deposited in a personal account set up in the individual's name.
- Individuals decide how their money is invested, usually based on a range of available investment options.
- The money in the individual's account is used to buy an annuity or transfer to a RRIF (a monthly income stream).
- The size and length of this income will depend on various factors such as total contributions, investment returns, and interest rates. It is not certain the income will last for life.
- At retirement, individuals may be able to buy a lifetime annuity that includes some additional benefits such as inflation protection — but these extras tend to be expensive, which reduces the amount they'll have available to provide an income stream.