Human resource management principles and practices

Human Resource Management

Discuss and contrast defined benefit, defined contribution, and cash balance pension plans.

A defined benefit plan is an employer-sponsored retirement plan whereby the retiree receives a monthly income for life and in some cases the life of his or her spouse as well (Defined Benefit Plans (DB) vs. Defined Contribution Plans (DC), 2009). The amount is calculated through a formula using factors such as salary history and duration of employment. "Investment risk and portfolio management are entirely under the control of the company. There are also restrictions on when and how you can withdraw these funds without penalties....This fund is different from many pension funds where payouts are somewhat dependent on the return of the invested funds...Therefore, employers will need to dip into the companies earnings in the event that the returns from the investments devoted to funding the employee's retirement result in a funding shortfall" (Defined benefit, 2009, Investopedia).

A cash balance plan is a type of defined benefit pension plan "under which an employer credits a participant's account with a set percentage of his or her yearly compensation plus interest charges...the plan's funding limits, funding requirements and investment risk are based on defined-benefit requirements," including length of service to the company (Defined benefit, 2009, Investopedia). This also means that changes in the portfolio do not affect the final benefits received by the employee upon retirement or although unlike the regular defined-benefit plan, the cash balance plan is maintained on an individual account basis (Cash balance pension plan, 2009, Investopedia).