What’s the Difference Between a Defined-Benefit and a Defined-Contribution Plan?
Employer-provided pensions are an essential part of retirement security. But fewer employers today provide pension benefits for their workers—and among those that do, many are offering “defined-contribution” rather than traditional “defined-benefit” pension plans.
Most union-negotiated pension plans are defined-benefit pension plans, which for decades have guaranteed retirees a fixed monthly income. These defined-benefit plans are usually funded entirely by employers through tax-exempt contributions and automatically cover all qualified employees. Since 1978, the number of defined-benefit plans plummeted from 128,041 plans covering some 41 percent of private-sector workers to only 26,000 today, according to the nonpartisan Employee Benefit Research Institute. The U.S. Bureau of Labor Statistics finds 21 percent of workers in the private sector have defined-benefit pensions.
Many companies have eliminated their defined-benefit plans and others have reduced the value of benefits and shifted to providing benefits through 401(k)s and other defined-contribution plans. In these plans, the employer only contributes a fixed amount to the plan each year. Defined-contribution plans shift the investment risk and responsibility to individual workers and typically reduce corporate costs.
Union Workers Have a ‘Union Advantage’ in Pensions
Because they have a voice at work, union workers have a “union advantage” in benefits and are much more likely to have pensions—and good pensions—than nonunion workers. Seventy-nine percent of union workers are covered by pension plans, compared with 44 percent of nonunion workers. And 70 percent of union workers have defined-benefit retirement coverage, compared with 16 percent of nonunion workers.
Your employer and in some cases your union can provide details about your own pension plan, but many online resources can help you keep an eye on your future retirement security.
UNION WORKERS ARE MORE LIKELY TO HAVE
HEALTH AND PENSION BENEFITS, 2005
Note: Defined-benefit pensions are a subset of all pensions. Disability refers to short-term disability benefits.
Source: U.S. Bureau of Labor Statistics, National Compensation Survey: Employee Benefits in Private Industry in the United States, March 2005.
Prepared by the AFL-CIO.
Union Retirement Websites
Check out pension information on your union’s website. In addition to these public websites, your union may have retirement benefits information in a “members-only” area of its website.
Don’t know an annuity from a thrift plan? Use this glossary from the American Savings Education Council.
More Resources
This is the motherlode of pension and 401(k) information from the federal agency charged with protecting them. Find out , information for and much more. Also check out PWBA’s explanation of .
Created by pension activists in 1996, the Coalition for Retirement Security is a volunteer, national grassroots organization that works to correct pension and health care inequities while educating workers about the importance of pensions and health care plans to retirees. The organization is particularly concerned about “cash balance conversion plans”—the changes in defined-benefit pension plans that can result in significantly lower pension benefit amounts for mid-life workers.
The Pension Rights Center identifies inequities in America’s pension systems, proposes reforms and helps employees and retirees understand and enforce their legal rights. The site answers basic questions about pension rights, has many useful addresses and telephone numbers and directs workers in certain geographical areas to projects that can help with their pension problems.
This is a site tilted toward benefits professionals, but it includes good information for participants as well. It provides information and tools about employee benefit plans sponsored by private and government employers and links to other sites of use to anyone planning to retire.
Women face greater retirement challenges than men because their lifetime earnings tend to be lower, they change jobs more and are more likely to work in industries with little or no pension coverage. This online pamphlet by the American Savings Education Council can help.
