The population is aging, and the instability and uncertainty of the nation's economy makes people, especially as they near retirement age, think about their futures and whether their savings or investments will support them once they stop working.
While younger workers may not prioritize retirement when entering the workforce or when considering a job offer, retirement benefits are an important factor in employee retention and satisfaction.
As the North Carolina Department of the State Treasurer noted in a summary citing consulting research, retirement plans tend to do a better job of retaining workers than attracting new hires, and pension plan design can influence how long employees stay with a company.
How employer-sponsored plans work
Employers offer a range of company retirement plans to help employees save and receive income in retirement; for more details on employer-sponsored plan options, see Employer-Sponsored Pensions, Annuities, and Lump-Sum Conversions.
One common way writers and educators describe these programs is by dividing them into two broad types: defined-benefit plans and defined-contribution plans.
Defined-Benefit Pension Plans
Defined-benefit plans promise a specific benefit at retirement, usually based on salary and years of service. Employers manage the fund, and the employer is responsible for ensuring there are enough assets to pay promised benefits.
Because the employer bears the investment and longevity risk, these plans are less common today than they once were; many companies shifted to other approaches to reduce long-term financial obligations.
Defined-Contribution Plans
Defined-contribution plans, such as many 401(k)-style accounts, rely on contributions from the employer, the employee, or both, with the retirement benefit depending on investment returns over time.
Both employers and employees may receive tax advantages on contributions, depending on plan structure and tax rules that apply to retirement accounts.
Some defined-contribution accounts are portable when an employee changes jobs, which can affect worker decisions about staying with or leaving an employer.
Employers and plan sponsors should also consider protections for plan assets and the potential need for insurance products tailored to retirement funds; for protections and coverage options for plan sponsors, trustees, and benefits funds, review Pension, Health, and Welfare Funds Insurance.
Given ongoing economic uncertainty, employees generally value any employer support for retirement savings, whether through traditional pensions, employer contributions to defined-contribution accounts, or other benefits; if you want to discuss options, talk to an agent.
Frequently Asked Questions
What is the main difference between defined-benefit and defined-contribution plans?
Defined-benefit plans promise a specific payout at retirement and put investment risk on the employer, while defined-contribution plans build an individual account and place investment risk on the participant.
Can I take my 401(k) when I change jobs?
Many defined-contribution accounts are portable, allowing rollovers to a new employer plan or an individual retirement account, but specific options depend on the plan rules.
Do employers get tax benefits for contributing to employee retirement plans?
Yes, employer contributions to qualified retirement plans generally receive favorable tax treatment, though the exact tax implications vary by plan type and jurisdiction.
What should I ask my employer about their retirement plan?
Ask about plan type, employer contribution levels, vesting schedules, investment options, portability, and any fees or protections for the plan assets.