Differences between defined benefits and defined contributions

| Jul 21, 2021 | Employment |

The Employee Retirement Income Security Act of 1974, also known as ERISA, was enacted to protect workers in California and the rest of the country. It keeps assets secure in retirement plans so that people have access to those funds once they retire. The different plans under ERISA are important to know about so that you can choose which is better for you.

What does ERISA do for employees?

Even though ERISA is a federal employment law, employers are not under obligation to provide a retirement plan to their employees. The law doesn’t specify an amount of money required to be paid as a benefit, either. However, the law does require businesses that offer retirement plans to meet minimum standards. Per ERISA, the following must be in place:

  • Plans must give participants full information about the plan, its features and funding options.
  • Minimum standards must be met for participating, vesting, funding and accruing benefits.
  • Plan fiduciaries must be accountable; those that don’t follow the rules can be held responsible for restoring any losses.
  • Participants have the right to sue for benefits and breaches of fiduciary duty.
  • Some benefits must be paid through the Pension Benefit Guaranty Corporation if a plan is terminated.

What are defined benefit and contribution plans?

ERISA offers two types of retirement plans for employees. Those are defined benefit plans and defined contribution plans, and they differ from one another. They include the following:

  • Defined benefit plan: This plan is funded by your employer and promises a specific monthly benefit once you retire. The plan might promise a benefit as an exact dollar amount or may be based on a calculation of things such as your salary, age and number of years you worked for the company.
  • Defined contribution plan: This plan doesn’t promise you a specific benefit amount after you retire. Both you and your employer contribute funding toward your account. You are usually responsible for determining how the contributions are invested, but the value of your account depends on how much is contributed and how well investments do.

An employment law attorney may help you decide which plan is right for you based on your needs and finances. An attorney may also be able to help you if your employer violates ERISA and you do not receive your benefits.