Defined Benefit Plan OR Defined Contribution Plan? Decisions, Decisions, Decisions…
January 17, 2014
By Diane Wasser, CPA
The implementation of an employee benefit plan by a company can stem from many things including employee retention, morale, retirement, competition, etc. As with any program, there are costs. Is one less costly than the other?
Most people initially believe that a defined benefit plan incurs more cost to the employer than a defined contribution plan. However, both plans consume a variety of resources.
In a defined benefit plan, generally all funds are employer contributions. Additionally, since the retirement distributions are set at the time of entry to the plan, the employer also assumes the risk of stock market losses on the invested funds.
With 401(k) defined contribution plans, employees are responsible for a majority of the contributions and also assume the market risk of loss. However, employers are responsible for depositing employee deferrals withheld from their pay into the plan on a timely basis, as strictly defined by the Department of Labor. Such processes take time for the employees at the company responsible for plan administration. The most significant expense for plan sponsors is generally the contribution level required by the employer. In a 401(k) defined contribution plan allowing employee deferrals, an employer may choose not make a company contribution.
Juggling the employer cost vs. the time commitment of your HR professionals to administer the plan is a balancing act for sure.