During retirement, workers in the United States look to benefits from employer-sponsored retirement plans for a substantial part of their income, along with Social Security, personal savings, and income from other sources. Many employer-sponsored retirement plans are "qualified," meaning that they meet the specific requirements of ERISA and the Internal Revenue Code. These qualified plans take numerous forms and there are varying strategies available to maximize employee benefits. Qualified plans include pension plans (defined benefit plans, money purchase, and target plans), profit sharing plans, stock bonus plans, and employee stock ownership plans (ESOPs).
The following table shows various retirement plan categories. Generally the plans become less restrictive and less expensive to maintain as you move from pension plans to profit sharing plans to tax-advantaged plans. Upon completion of this course, you should be able to select the best plan for a given scenario; plan selection has been heavily tested on the CFP® Certification Examination.
We will begin with the two defined benefit plans in this module, and then cover the other types of retirement plans in future modules.
As the name implies, defined benefit plans offer certainty as to the benefit that employees will receive if they work until their company's normal retirement age. Defined contribution plans, though, are so named because it is the contribution amount (typically a percentage of compensation) that we are defining; the ultimate benefit is unknown. Dollars contributed and investment performance will determine what a participant will get from the plan at retirement.
Kristen MacKenzie, MBA, CFP®, CRPC® is an associate professor at the College for Financial Planning. Kristen has over 20 years of experience in the financial services industry, both as an active financial planner and as a provider of financial education. She graduated from the University of Connecticut with a degree in economics and later received her MBA at the University of Colorado.
Michael Angell, CFP®, EA is an associate professor at the College for Financial Planning. He obtained his bachelor's degree in mathematics at Creighton University. His 20+ years of work experience includes banking, insurance, investments, retirement, and estate planning. In addition to his responsibilities at the College, Michael also serves as a private client services advisor with an independent investment firm and is also a federally licensed tax practitioner with a nationally recognized company. You can contact him at Michael.Angell@cffp.edu.