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In this regard, there are two main types of pension plans: defined benefit and defined contribution plans. Investment of Own Bank Employee Benefit Plans In Proprietary Mutual Funds (13). A second, and more common way of generically describing various types of employee benefit plans involves the method used to determine how assets are contributed to the plan. Economically Targeted Investments (ETIs or Social investing) (4). The plan sponsor (employer or union) is responsible for ensuring that sufficient assets are in the plan to pay those defined benefits. The participant is entitled to whatever amount the formula results in, and has a claim against all of the plan's assets for payment of the vested benefit. Defined benefit plans are more expensive to administer and operate than defined contribution plans. IRS regulations governing the integration of Social Security benefits are complex and designed to prevent discrimination in favor of highly paid employees. This entitlement is termed "vesting." In this approach, the benefit payment is defined.
The focus of much of the attention, and controversy, surrounds diminished benefits for employees with long years of service.
In recent years, this type of plan has become increasingly popular.
Cash balance plans are similar to traditional defined benefit pension plans in that: (a) they guarantee a specific benefit upon retirement which is not dependent upon the plan's investment performance; (b) retirement benefits are payable as an annuity with surviving spouse protection; (c) employers must follow minimum funding policies under ERISA, and (d) basic plan benefits are guaranteed by the PBGC up to limits set by law.
Despite this protection, some conversions by high profile employers have attracted media attention.
Most of these plans have emerged as conversions from overfunded traditional defined benefit pension plans. And employers cannot remove overfunded assets unless the plan has been terminated and full benefits under the terminated plan have been funded.
This is opposed to retirements under traditional defined benefit pension plans, where retirees are entitled to lifetime monthly annuities based upon years of service and pay.