The answer is obvious. Both can be difficult and often impossible to understand.
Unfortunately, there is no such canned (pardon the pun) explanation to help communicate a defined benefit plan to employees. Hence, no surprise with the results of a recent Fidelity survey conducted online by Versta Research, an Evanston, IL based market research and public opinion polling firm.
The 506 respondents who were participants in both current and frozen defined benefit pension plans indicated that:
- 31% don’t know their plan’s vesting schedule.
- 40% percent don’t know what their distributions will be at retirement.
- 27% don’t know don’t know at what age they can begin to receive payments.
That’s what they said they don’t know. I can tell you directly from working with defined benefit pension plans for more than a few years, it’s just the tip of the iceberg. So let’s approach it from the standpoint of what employees need to know about their defined benefit pension plan. Here are some of the basics:
Type of Plan
- The plan is funded by the employer and promises to pay a participant a specific benefit at retirement.
- If the Plan is covered by the Pension Benefit Guaranty Corporation (PBGC), a certain amount of retirement benefits are guaranteed if the if the plan is terminated without enough money to pay all of the promised benefits.
- There is no PBGC coverage for for defined contribution plans such as 401(k).
- When an employee becomes eligible..
- How benefits accrue (accumulate).
- How benefits vest (become non-forfeitable).
- When distributions can be taken.
- What distribution options are available.
- Whether benefits can be reduced or the plan terminated.
It’s obviously a more difficult and complicated employee education process than for 401(k) plans. Instead of explaining 401(k) concepts like dollar cost averaging, compounding, and asset allocation, employee education programs have to deal with more esoteric concepts like actuarial equivalence, joint and survivor, and the plan’s funded status.
Nonetheless, the effort has to be made so that employees can understand when and how much monthly retirement income they could expect and to factor that into their personal planning. That is, of course, for those still fortunate to be part of a defined benefit pension plan.
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