The New Rules of Retirement

Chapter 10Handling Employer Retirement Plans

Employer retirement plans come in two main types. They are very different types of plans and generate different issues and decisions. (I'm talking only about tax-qualified retirement plans in this chapter.)

One type of qualified retirement plan is the defined benefit plan. This is the old-fashioned pension plan that promises the employee a regular payment after retirement. The employee generally has to work for a minimum period to be vested in any defined benefit and for a longer period to qualify for the full or maximum benefit. The retirement benefit usually is a fixed monthly amount payable for life or for the joint life of the employee and his or her spouse. In some plans the payment is indexed for inflation, but not in most private sector plans.

Fewer and fewer private-sector employers offer defined benefit plans. Decades ago, most large employers and many smaller employers offered defined benefit pensions to employees. But a series of tax and accounting changes caused employers to reduce or eliminate defined benefit plans. Now, defined benefit plans are most likely to be offered to government and union employees. A number of large private-sector employers also offer defined benefit pensions, but these pay relatively small amounts to retirees. Retirees are expected to supplement their retirement income with 401(k) plans and other savings. Also, large employers have been steadily scaling back or eliminating their defined benefit ...