What is the difference between defined benefit and defined contribution?

A defined benefit plan is the responsibility of the employer, while the employee takes responsibility for a defined contribution plan. We’ll discuss the differences as well as the pros and cons. A financial advisor can help you get a handle on options for saving for retirement.

How does a defined benefit plan work?

A defined benefit plan, commonly known as a pension, is administrated and funded by an employer. Here's how they work: Employers make contributions to the pension plan periodically or annually. The amount uses a retirement income calculation based on an employee's years of service with the company, their age and their salary.

What is a defined contribution plan?

A defined contribution plan, on the other hand, does not promise a specific amount of benefits at retirement. In these plans, the employee or the employer (or both) contribute to the employee's individual account under the plan, sometimes at a set rate, such as 5 percent of earnings annually.