Defined Benefit Plans vs. 401(k) Plans
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How does a Defined Benefit Plan differ from a 401(k) plan?
A defined benefit plan like the Co-op Retirement Plan is a traditional type of pension plan that pays benefits according to a formula based on wages and service. Here are some major ways that it differs from a 401(k) plan:
You are entitled to a lifetime monthly benefit from a defined benefit plan, a benefit you can never outlive. It can help you meet your income-replacement goals. In a 401(k) plan you have a dollar balance, which might be depleted before your death.
The benefit you receive in a defined benefit plan is not dependent on investment performance. You will receive the benefit promised by the Plan’s formula regardless of the investment return and volatility of the financial markets. In a 401(k) plan your account balance is directly affected by the ups and downs of the investments you have chosen.
The assets of a defined benefit plan are managed by fiduciaries for the benefit of all participants. In a 401(k) plan you must make your own investment decisions.
Your benefit in a defined benefit plan is safeguarded (within limits) by the Pension Benefit Guaranty Corporation, a federal agency that insures pension plans. No similar protection exists for a 401(k) plan.
