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Defined Benefit Plans: A Critical
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Defined Benefit Plans
A Critical Element in Employee Retirement Planning
In today's fluctuating economy, employers in both the private sector and nonprofit world are searching for effective methods to provide a safe and secure retirement benefit for employees without unduly taxing the budget. Because of a myriad of retirement funding options, organizations are often unsure of the best approach to practically and appropriately meet employee needs.
Ideally, an employee's retirement income should stem from a variety of sources, including but not limited to the following:
• Employer-funded vehicles such as defined benefit plans
• Employee-funded vehicles, including defined contribution plans
(401(k), 403(b), etc.) and personal savings accounts
• Social Security
A combination of these vehicles can ensure retirement income stability even if one element in the group fails to deliver as expected. For example, if a poor economy reduces the rate of return for employee savings plans, an employer-funded option and Social Security can still generate significant retirement income. With the shortfalls projected with Social Security benefits, employer- and employee-funded savings plans will be essential to make up possible shortfalls.
Unfortunately, many employers are shying away from employer-funded options such as defined benefit plans, considering them too onerous and outdated. With pressure to reduce expenses, a number of organizations have eliminated or frozen existing defined benefit plans in order to save money.
There are several advantages to offering a defined benefit plan as well as several disadvantages to freezing one. Organizations should fully understand and appreciate the nuances of this type of vehicle before making any long-lasting decisions.