NJ: 201.445.8711     NY: 516.305.1996

Types of Pension Plans

There are two general types of retirement plans: the Defined Benefit Plan and Defined
Contribution Plan.

Defined Benefit Plan

This type of plan promises that upon retirement the employee will receive a
defined (known) monthly income for the duration of their lifetime. The yearly
contributions necessary to provide the promised monthly benefit upon retirement
are unknown, however, these contributions are dependent upon a number of
variables, such as:

  • the amount of the monthly benefit to be received upon retirement
  • the number of years an employee has left until retirement
  • the length of time benefits will be received after retirement
  • the amount of income that can be earned from the accumulating yearly contributions

Defined Contribution Plan
This plan is one in which the contributions to the plan are known (defined); however,
the amount of money to be distributed upon retirement is unknown. This amount of
money will be dependent upon the manner in which the yearly contributions have been
invested and how much they have grown in value over the years of employment.

For example, the  employee and/or the employer contributes yearly into the
plan a fixed percentage of the employee's earned income each year. The money
contributed to the plan is used to purchase stock, bonds, mortgages,
certificates of deposit, treasury notes, etc. The value of these investments
and the interest generated as a result will be distributed to the employee in
one lump sum upon retirement. Upon receiving this lump sum distribution, the
employee usually purchases an annuity which provides him with a specific
monthly income for life.