What’s the Difference Between a Defined-Benefit and a Defined-Contribution Plan?
Employer-provided pensions are an essential part of retirement security. But
fewer employers today provide pension benefits for their workers—and among
those that do, many are offering “definedcontribution” rather than traditional
“definedbenefit” pension plans.
Most union-negotiated pension plans are definedbenefit pension plans, which
for decades have guaranteed retirees a fixed monthly income. These definedbenefit
plans are usually funded entirely by employers through tax-exempt contributions
and automatically cover all qualified employees. Since 1980, the number of
definedbenefit plans plummeted from 148,096
plans covering some 38 percent of private-sector workers to only 48,982 today . The U.S. Bureau of Labor
Statistics finds 20 percent of workers in the private sector have definedbenefit
pensions.In the public sector, defined
benefit plan coverage is four times greater—about 79 percent according to BLS.
Many companies have eliminated their defined-benefit plans and others have
reduced the value of benefits and shifted to providing benefits through 401(k)
savings plans or other defined-contribution
plans. In these plans, the employer only contributes a fixed amount to the plan
each year. Defined-contribution plans shift the investment risk and
responsibility to individual workers and typically reduce corporate costs.
Union Workers Have a ‘Union Advantage’ in Pensions
Because they have a voice at work, union workers have a “union
advantage” in benefits and are much more likely to have pensions—and good
pensions—than nonunion workers. Eighty-two percent of private sector union
workers are covered by pension plans, compared with 48 percent of nonunion
workers. And 66 percent of union workers
have defined-benefit retirement coverage, compared with 15 percent of nonunion
workers.
Your employer and in some cases your union can provide details about your
own pension plan, but many online resources can help you keep an eye on your
future retirement security.
UNION WORKERS ARE MORE LIKELY TO HAVE HEALTH AND PENSION BENEFITS, 2005
Note: Defined-benefit pensions are a subset of all pensions. Disability refers to short-term disability benefits.
Source: U.S. Bureau of Labor Statistics, National Compensation Survey: Employee Benefits in Private Industry in the United States, 2009 (Private Industry Workers, Tables 2, 9 and
16).
Ad Hoc Coalition to Restore Retirement Security Created by pension activists in 1996, the Coalition for Retirement Security is a volunteer, national grassroots organization that works to correct pension and health care inequities while educating workers about the importance of pensions and health care plans to retirees. The organization is particularly concerned about “cash balance conversion plans”—the changes in defined-benefit pension plans that can result in significantly lower pension benefit amounts for mid-life workers.
Pension Rights Center The Pension Rights Center identifies inequities in America’s pension systems, proposes reforms and helps employees and retirees understand and enforce their legal rights. The site answers basic questions about pension rights, has many useful addresses and telephone numbers and directs workers in certain geographical areas to projects that can help with their pension problems.
BenefitsLink This is a site tilted toward benefits professionals, but it includes good information for participants as well. It provides information and tools about employee benefit plans sponsored by private and government employers and links to other sites of use to anyone planning to retire.
Women and Pensions Women face greater retirement challenges than men because their lifetime earnings tend to be lower, they change jobs more and are more likely to work in industries with little or no pension coverage. WISER Women’s Institute for a Secure Retirement covers
all the bases for women.
National Conference on Public Employment Retirement Systems (NCPERS) The National Conference on Public Employment Retirement Systems (NCPERS) is the largest trade association for public-sector pension funds, representing more than 500 public funds throughout the United States.
