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Function of a benefit plan and a pension plan is to provide income for an individual after he or she retires from work. There are plans that provide more benefits than mere pension and these are called benefit plans. There are for example the vested termination benefits, disability benefits, and they can be defined plans or defined benefits based on the type of the plan that is being chosen. The defined contribution plan defines the method and type of benefit that accrues to the employee over the years. (Winklevoss, 1993) In other words it has a defined amount or quantity that may be fixed. Benefits on the other hand are extra given to a person opting for a plan. The benefit plans are protected by federal insurance of the Pension Benefit Guaranty Corporation -- PBGC.
Define the purpose and function of a contribution plan
The contribution plan is not based on any specific amount of benefits at retirement. In this plan the employee or the employer can make contribution to the employee's individual account. This can be under a set rate like a percent of the pay. They are invested and thus the investment brings in extra benefits and these are based on the investment gains or losses. The value will keep fluctuating with the value of the investments. For example 401(k) plans, 403(b) plans,...
(United States Department of Labor, 2012)
3) What does the term vesting mean? Why is vesting important?
Vesting is the term that means the rate at which the employee's benefits after the participant's retirement are guaranteed. Thus the vesting provisions are very important where there is a lot of mobile labor. These vesting provisions guarantee that a worker will receive all the future benefits and is a mandatory provision under the Employee Retirement Income Security Act -- ERISA, 1974, and the vesting schedule allows a laborer to retire even before the person is eligible to retire and the person will not lose the accrued benefits. Likewise the process of vesting will guarantee continued payments to the spouse of an employee who dies while at work before retiring. (Graham, 1998)
4) Compare and contrast the cash balance plan and the contribution plan
Cash balance plan is a type of derived benefit plan where the employee is credited with employer contribution which is a flat cash value each pay day and this is also based on a percentage of the employees pay. (Ellig, 2004) Thus a cash balance plan…
References
Ellig, Bruce. R. (2004) "The Complete Guide To Executive Compensation" Tata
McGraw-Hill Education.
Graham, Avy D. (1998) "How has vesting changed since passage of Employee
Retirement Income Security Act?" BLS, vol. 111, no. 8, pp: 15-21.
Report to the Pension and Welfare Benefits Administration Of the U.S. Department of Labor" Retrieved 24 August, 2012 from http://www.dol.gov/ebsa/pdf/Mitchell020300.pdf
United States Department of Labor" Retrieved 24 August, 2012 from http://www.dol.gov/dol/topic/retirement/typesofplans.htm
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