February 15, 2023
People looking for a place to build a career look for companies with good benefits. Across the board, most medium to large US companies provide benefits that people have come to expect, such as medical and dental insurance, flexible spending accounts, group term life insurance, disability insurance, and typically, a retirement plan.
Employers can offer several types of retirement funds as part of an employee’s benefit package. These retirement plans usually fall under a defined-benefit plan or a defined-contribution plan.
The Employee Retirement Income Security Act of 1974 (ERISA) is enforced by the Internal Revenue Code. This federal statute sets standards for most employer and union sponsored retirement plans in private industries. The IRS establishes the rights and responsibilities of the sponsor and participants.1
Retirement plans are governed by these guidelines,There is no guarantee if a company goes bankrupt pensions will be paid out. The Pension Benefit Guaranty Corporation (PBGC) is typically used to insure against such occurrences, but this may only guarantee an employee’s payments to a certain amount. 2
Pension plan
A pension plan is a defined-benefit plan offered by employers. They are becoming rare in U.S. private companies. It costs less for employers to switch to a defined-contribution plan.1 The US Bureau of Labor Statistics reports 15% of private employees in the US are covered by a defined-benefit plan.4 Pension plans are not guaranteed to be continuous if the employer desires to discontinue the benefit in the future.
Defined-benefit plan
A defined-benefit plan is funded by the employer. The plan promises payment of a specific amount upon retirement. The amount an employee receives is determined by a formula which is usually based on earnings and years of service.
In a defined-benefit plan, the employer is responsible to guarantee the payment arrangement provided the employee has satisfied the requirements for eligibility. Most defined-benefit plans are paid out monthly for the lifetime of the retired employee.
Defined-Contribution plan
A defined-contribution retirement plan does not promise a defined amount of money at retirement. The employer and employee both contribute to the employee’s individual account within the retirement plan. The plan usually gives the employee options on how to invest the contributions. In a defined-contribution plan, the final benefit is determined by the plan’s resulting performance on the investments made. Therefore, it does not promise a specific amount. The company is liable only to the extent of the total contributions expended.
For private companies, the most popular form of a workplace retirement plan is a 401(k) plan. A 401(k) plan allows a defined contribution that is tax-advantaged for retirement savings and is sponsored by the employer.
Benefits of a 401(k) plan
An employee who participates in a 401(k) plan agrees to have a set amount or percentage of their earnings each month or paycheck to be paid directly into an investment account. The investment account typically has many investment options, especially mutual funds.
Companies can choose to contribute to the employee’s 401(k) fund. There are many options for matching the employee’s contribution as a benefit and to incentivize people to save.
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Why not have both?
Globe Life has both a 401(k) defined-contribution plan, and a Globe Life Pension defined-benefit plan for all qualified employees. Working for a company that has gained 120 years of insurance knowledge and expertise in the insurance industry is a smart choice in building a great career, with benefits that continue to grow with you.
Globe Life has many other benefits, including health insurance coverage which includes medical, drug prescriptions, vision, and dental insurance, health spending accounts, flexible spending accounts, and life and disability insurance.
There are many career options and locations at Globe Life. Find out more.
Sources:
- https://www.pbgc.gov/
- https://www.dol.gov/agencies/ebsa/about-ebsa/our-activities/resource-center/fact-sheets/what-is-erisa#:~:text=ERISA%20covers%20retirement%20plans%20and%20welfare%20benefit%20plan.
- https://www.dol.gov/sites/dolgov/files/EBSA/about-ebsa/our-activities/resource-center/publications/what-you-should-know-about-your-retirement-plan.pdf
- https://data.bls.gov/timeseries/NBU21900000000000028290
Other Sources: