Defined Benefit vs. Defined Contribution

Question 1

What is the Annual Contribution Limit for Defined Benefit (DB) plans?

Answer 1

Not less than unfunded current liability

For Defined Contribution (DC) plans, the limit is 25% of Covered Compensation.

Question 2

Who assumes the investment risk in Defined Benefit (DB) plans?

Answer 2

The Employer

In Defined Contribution (DC) plans, the investment risk is assumed by the Employee.

Question 3

How are forfeitures allocated in Defined Benefit (DB) plans?

Answer 3

Reduce Plan Costs

In Defined Contribution (DC) plans, forfeitures can either reduce plan costs or be allocated to remaining participants.

Question 4

Does the Pension Benefit Guaranty Corporation (PBGC) provide coverage for Defined Benefit (DB) plans?

Answer 4

Yes (except professional firms with less than 25 employees)

DC plans do not have PBGC coverage.

Question 5

Does the plan have separate investment accounts in Defined Benefit (DB) plans?

Answer 5

No, they are commingled

In Defined Contribution (DC) plans, investment accounts are usually separate.

Question 6

Is there credit for prior service in Defined Benefit (DB) plans?

Answer 6

Yes

In Defined Contribution (DC) plans, there is no credit for prior service.