Question

Would an employee who first becomes a participant in a pension at age 52 generally prefer to have a defined benefit plan or a defined contribution plan? Explain.

Answer 1

The employee should prefer a defined benefit plan.

The benefit plan has a specific amount of pension for an employee. Therefore, the amount is fixed and guaranteed by the employer.

On the other hand, the contribution plan doesn’t have such surety of fixed amount of benefit; here, the amount of current contribution is fixed and assured by the employer but how much the fund can accumulate in future is uncertain – generally long period of accumulation may give higher return; therefore, the benefit amount is not certain. The contributed fund may not have such return what expected.

The participant’s age is very high (52 years). The long period of accumulation is not possible here because of approaching his/her retirement age. Therefore, it is better to have defined benefit plan where at least a certain amount is confirmed in future.