What's the difference between a defined benefit and a defined contribution pension plan?

By Cynthia Ann Brassington
August 21, 2017

A defined contribution plan and a defined benefit plan are different and they can be identified by the wording of them. For example, a defined benefit plan is this: you don't know what you're going to be putting in every week. It might 6 percent of your salary, 6.5 percent of your salary, 7 percent of your salary, depending on the plan but you know what you're going to get back. You're going to receive back the average of your last three years of salary prior to retirement.

For example, some plans are 50 percent of the average of the three years, some plans are 40, some plans are 60. Depending on what you have in your plan, that will define your benefit so we know exactly what your benefit's going to be.

However, with a defined contribution plan you know what you're going to put in. You're going to put in 4 percent of your salary. If it's a 401K or a 403B, for example, for profit-sharing, you know what your employer is going to put in at the end of the year but you really don't know what you're going to get back because it depends on market forces. That money could go up, it could increase in value or it could go down, it can decrease in value, depending on the market forces.

New Jersey attorney Cynthia Ann Brassington is certified by the Supreme Court of New Jersey as a Matrimonial Law Attorney, and regularly helps people to resolve their divorce-related issues, from property division, to child support, and custody. To learn more about Cynthia and her practice visit www.LinwoodFamilyLaw.com.

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August 21, 2017
Categories:  Financial Issues|FAQs

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