What Are the Different Types of Business Retirement Plans?

Geri Terzo

There are two primary types of business retirement plans, under which there are additional choices. The main categories include defined benefit plans and defined contribution fund structures. Defined benefit plans are a type of pension that businesses offer when these organizations are interested in making the investment decisions for employees, who become plan members. In a defined contribution structure, under which 401(k) funds are grouped, the plan sponsor, or employer, has a say in the types of investment choices but individual plan members essentially create their own retirement portfolio.

Defined benefit and defined contribution are the two primary types of business retirement plans.
Defined benefit and defined contribution are the two primary types of business retirement plans.

Businesses that adopt defined benefit plan structures are essentially taking on much of the risk for the retirement benefits. This is because funding for the plan, which is dependent on cash contributions made by plan sponsors and employees as well as investment activity in the financial markets, is the responsibility of the business. The plan sponsor must make decisions in a way that protects the retirement benefits of plan members. If it appears that plan funding is becoming dangerously low, companies might attempt to increase the size of business retirement plans by investing in higher-return securities.

Defined contribution funds are unique in that these plans permit the participation of plan members. The plan sponsor is responsible for adopting some pool of individual investment funds from which plan members can choose. These investment portfolios can contain as much risk as the plan sponsor sees fit, although many businesses will consider feedback provided by employees. The plan members then have the choice to invest in the funds that are most appropriate to help each individual reach his or her retirement goals.

In the U.S., many business retirement plans are structured as 401(k) plans. Much of the performance in these funds is dependent on the direction of the financial markets and also cash contributions. It is common for employers to match employee deposits into a 401(k) plan up to a certain percentage of total plan assets. The contribution matching element is an attractive feature that businesses can use for hiring or retaining personnel.

Defined contribution business retirement plans may hire administrators with relationships to asset managers. The individual investment funds from which employees can select can be dependent on the administrator's offerings. Employees may be given the option to borrow money from business retirement plans, including defined benefit and defined contribution structures, although these allowances are typically outlined by individual plan sponsors.

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