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DEFINED BENEFITS/DEFINED CONTRIBUTIONS Defined Benefits A traditional defined benefit (DB) plan is a plan in which the benefit on retirement is determined by a set formula, rather than depending on investment returns. The benefit in a defined benefit pension plan is determined by a formula that can incorporate the employee's pay, years of employment, age at retirement, and other factors. In an unfunded defined benefit pension, no assets are set aside and the benefits are paid for by the employer or other pension sponsor as and when they are paid. In a funded plan, contributions from the employer, and sometimes also from plan members, are invested in a fund towards meeting the benefits. The future returns on the investments, and the future benefits to be paid, are not known in advance, so there is no guarantee that a given level of contributions will be enough to meet the benefits. Defined Contributions In a defined contribution plan, contributions are paid into an individual account for each member. The contributions are invested, for example in the stock market, and the returns on the investment (which may be positive or negative) are credited to the individual's account. On retirement, the member's account is used to provide retirement benefits, sometimes through the purchase of an annuity which then provides a regular income. Money contributed can either be from employee salary deferral or from employer contributions. In a defined contribution plan, investment risk and investment rewards are assumed by each individual/employee/retiree and not by the

DEFINED BENEFITS/DEFINED CONTRIBUTIONS Defined Benefits A traditional defined benefit (DB) plan is a plan in which the benefit on retirement is determined

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CONCERNS ON ADOPTING DEFINED CONTRIBUTION AT THE UM SYSTEM 1.If there is mandatory employee contribution, (in a matching scenario), it may present a financial hardship for some; especially, for young staff. 2.Not all are investment savvy to utilize the freedom to invest. 3.While the cost for the employee is known, the benefits are unknown (till the end). 4.The average university contribution appears to be 9 to 10% in major universities; If UM is to be attractive and adopts such competitive rates, the Defined Contribution cost seems to be more than the Defined Benefits cost.

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Page 1: DEFINED BENEFITS/DEFINED CONTRIBUTIONS Defined Benefits A traditional defined benefit (DB) plan is a plan in which the benefit on retirement is determined

DEFINED BENEFITS/DEFINED CONTRIBUTIONS

Defined BenefitsA traditional defined benefit (DB) plan is a plan in which the benefit on retirement is determined by a set formula, rather than depending on investment returns.The benefit in a defined benefit pension plan is determined by a formula that can incorporate the employee's pay, years of employment, age at retirement, and other factors.In an unfunded defined benefit pension, no assets are set aside and the benefits are paid for by the employer or other pension sponsor as and when they are paid.In a funded plan, contributions from the employer, and sometimes also from plan members, are invested in a fund towards meeting the benefits.The future returns on the investments, and the future benefits to be paid, are not known in advance, so there is no guarantee that a given level of contributions will be enough to meet the benefits.

Defined ContributionsIn a defined contribution plan, contributions are paid into an individual account for each member.The contributions are invested, for example in the stock market, and the returns on the investment (which may be positive or negative) are credited to the individual's account. On retirement, the member's account is used to provide retirement benefits, sometimes through the purchase of an annuity which then provides a regular income.Money contributed can either be from employee salary deferral or from employer contributions.In a defined contribution plan, investment risk and investment rewards are assumed by each individual/employee/retiree and not by the sponsor/employer.

Page 2: DEFINED BENEFITS/DEFINED CONTRIBUTIONS Defined Benefits A traditional defined benefit (DB) plan is a plan in which the benefit on retirement is determined

CONCERNS OF CURRENT EMPLOYEES UNDER CURRENT PLAN

1. Change in the formula in Defined BenefitsThe current formula for benefits:Benefit per year = 2.2% * Average of salary for 5 years preceding the

retirement year * length of serviceMajor Concerns• The factor 2.2% may undergo change.• Employee contributions may be increased.

2. Meeting the ShortfallIf there is a shortfall in paying for Defined Benefits during a transition to

Defined Contribution, those under Defined Benefits may be asked to pay.

Page 3: DEFINED BENEFITS/DEFINED CONTRIBUTIONS Defined Benefits A traditional defined benefit (DB) plan is a plan in which the benefit on retirement is determined

CONCERNS ON ADOPTING DEFINED CONTRIBUTION AT THE UM SYSTEM

1.If there is mandatory employee contribution, (in a matching scenario), it may present a financial hardship for some; especially, for young staff. 2.Not all are investment savvy to utilize the freedom to invest. 3.While the cost for the employee is known, the benefits are unknown (till the end).4.The average university contribution appears to be 9 to 10% in major universities; If UM is to be attractive and adopts such competitive rates, the Defined Contribution cost seems to be more than the Defined Benefits cost.

Page 4: DEFINED BENEFITS/DEFINED CONTRIBUTIONS Defined Benefits A traditional defined benefit (DB) plan is a plan in which the benefit on retirement is determined

DATA/FACTS NEEDED TO HELP MAKE A MEANINGFUL DECISION/COMPARISON

1.What is the current status of the stabilization fund? Were the investment results in the last year and current year as bad as forecast? If not, what happens to the employee contribution rate?2.If the UM system should change to the Defined Contributions, how will the initial shortfall in Defined Benefits be made up?3.What will be the UM system contribution rate be to a Defined Contribution plan?4.What will be the mandatory contribution rate from the employees?5.Will the UM system offer both the Defined Benefits and Defined Contribution Plans?