Pension Plans Explained: Defined Contribution vs Defined Benefit Plans
Get more in-depth lessons via Axel's Accofina books:
(1) Financial Statement Basics https://www.amazon.com/Financial-Stat...
(2) Ratio Analysis Fundamentals https://www.amazon.com/Ratio-Analysis...
Pension Plans Explained: Defined Contribution vs Defined Benefit Plans
What are Pension Plans? 2:02
Key Differences between Defined Contribution and Defined Benefit Plans 5:05
Accounting for the 2 Types of Plans 10:05
Personal Finance Implications for Both Types of Plans 13:10
PERSONAL FINANCE & FINANCIAL PLANNING
Pension Plans:
Defined Contribution Plans vs Defined Benefit Plans
WHAT ARE PENSION PLANS?
Individual Investment Accounts to assist Funding Your Retirement
Individuals being encouraged to better fund their own retirement,
through individual investment accounts.
These can both reduce burden on state, while also improves the standard of living in retirement
These accounts funded by employers or individuals themselves and often receive favourable taxation treatment
These accounts have restrictions on accessing the funds prior to retirement
Pension Plans System often Dependant on National Jurisdictions
This video may be played anywhere in the world, so I have to talk in generalisations. But you’ll find specific systems, structures and rules are based on where you’re located.
In the US:
401(k) Accounts
In Australia:
Superannuation Account within a superannuation fund
In Ireland:
PRSA, or a Personal Retirement Savings Account
But no matter your location, the consensus view is that there are 2 Distinct Types, or categories, of Plans:
1) Defined Contribution Plan
2) Defined Benefit Plan
KEY DIFFERENCES BETWEEN 2 TYPES OF PLANS
Defined Contribution Plan:
Employer only obligated to contribute set amount each period
No guarantee of future benefits, only committed to the contribution.
E.g. minimum 9.5% of earnings in Australia
Therefore the employee bears the investment risk
Defined Benefit Plan:
Employer is obligated to provide an income stream post retirement
Income stream amount dependent on variety of factors, e.g. length of service or salary at retirement
Employer bears investment risk
i.e. they the promising a particular income stream and must have the plan assets to meet these commitments
In general:
These plans can cause huge liabilities for some companies
Are being phased out and 'defined contribution plans' are becoming the standard
ACCOUNTING FOR BOTH PLANS
Defined Contribution Plan:
Much simpler accounting
Income Statement:
‘Pension Expenses’ are just the contribution made
Balance Sheet:
No impact, i.e. no recognition
Defined Benefit Plan:
More complex accounting. Differences in accounting between IFRS and US GAAP
Income Statement:
‘Pension Expenses’ can involve any new pensions earned by employees, benefits paid from past employees and interest
Balance Sheet:
Compare the Plan Assets vs Estimated PV of Pension Obligations
Net pension asset or net pension liability on balance sheet
PERSONAL FINANCE IMPLICATIONS
Defined Contribution Plan:
Must monitor Performance of Contributions
Must monitor Allocation of Contributions
(1) Determine post retirement income needs,
(2) Estimate the balance needed that should generate that income,
(3) Plan to reach the balance needed by adjusting contributions
and monitoring fund performance
Defined Benefit Plan:
Must monitor the financial strength of Plan
Must monitor communications from the managing entity, and it’s management
Learn the rules of how your Defined Benefit Plan works
DISCLAIMER
The business AccoFina, and myself the individual, are not giving personal advice in this video.
It is meant to provide factual information for educational purposes.
We do not know your personal circumstances and financial goals.
Neither AccoFina or myself hold an AFSL, nor are we authorised representatives of an AFSL holder. We are not a licensed financial advisor.
This is general information only and should not be taken as constituting professional advice. You should consider seeking independent legal, financial, taxation or other advice to check how this information relates to your unique circumstances,
before taking (or not taking) any actions.
AccoFina and myself are not liable for any loss caused, whether due to negligence or otherwise arising from the use of, or reliance on,
the information provided directly or indirectly, by this video.
--------------------
Thumbnail Photo by Daniel Spase from Pexels
---------------------
This video was brought to you by AccoFina.
Subscribe to the Channel:
https://goo.gl/84Sfeg
Or just check out the Channel Page:
https://goo.gl/yTj9Bs
Here’s AccoFina’s Most Popular YouTube Video:
https://goo.gl/Jbv685
And here’s AccoFina’s Latest YouTube Upload:
https://goo.gl/wDM83Y
http://www.accofina.com
http://www.amazon.com/author/axeltracy
#Wealth #FinancialEducation #PersonalFinance