MONEY MATTERS: Defined benefit pension

Money Matters

What is a defined benefit pension and how does it work?

A defined benefit pension is the pension you think of way back in the 50s and 60s the Ford the GM pensions that you hear of.

They're becoming more rare. But in a broad sense qualified plans come in two broad categories, you've got a define contribution, 401ks, 403bs, you're defining what's going in.

We don't know what will come out down the road because we don't know how the market is going to be.

A defined benefit is actually determined what needs to go in it so it's usually a formula based so you know what's going to come out.

So we're defining what your benefit is going to be generally based on a formula on the years of employment. And the risk on a defined benefit is more so on the employer because their making the contribution, the lion share of it.

Generally where you see pensions now is in the public service sector and the biggest example is IPERS for the teachers. And Iowa's got a very good pension and it's very healthy or it was anyway.

So there's contribution from the employer and also the employee is required to make some too. So like for IPERS if someone works they hit the rule of 88 their age plus years of service and it defines what they're going to get paid for the rest of their life. So that's a defined benefit pension.

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