What is a disadvantage of a defined benefit pension plan compared to a defined contribution plan?

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Multiple Choice

What is a disadvantage of a defined benefit pension plan compared to a defined contribution plan?

A defined benefit pension plan, which guarantees a specific payout at retirement based on a formula, indeed tends to require higher employer contributions compared to a defined contribution plan, such as a 401(k). This is primarily because the employer is responsible for funding the pension plan and must ensure there are sufficient assets to meet the promised retirement benefits, regardless of investment performance in the plan's portfolio. In a defined contribution plan, the contributions are typically fixed as a percentage of salary, and the retirement benefit depends on investment performance over time. This shift of responsibility for retirement income from the employer to the employee often results in lower overall contributions from employers under defined contribution plans when compared to the funding obligations of a defined benefit plan. Therefore, the correct answer correctly highlights that defined benefit plans can place a larger financial burden on employers, which can be a significant disadvantage in terms of cost and financial planning for the company.

A defined benefit pension plan, which guarantees a specific payout at retirement based on a formula, indeed tends to require higher employer contributions compared to a defined contribution plan, such as a 401(k). This is primarily because the employer is responsible for funding the pension plan and must ensure there are sufficient assets to meet the promised retirement benefits, regardless of investment performance in the plan's portfolio.

In a defined contribution plan, the contributions are typically fixed as a percentage of salary, and the retirement benefit depends on investment performance over time. This shift of responsibility for retirement income from the employer to the employee often results in lower overall contributions from employers under defined contribution plans when compared to the funding obligations of a defined benefit plan.

Therefore, the correct answer correctly highlights that defined benefit plans can place a larger financial burden on employers, which can be a significant disadvantage in terms of cost and financial planning for the company.

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