Question

Which of the following statements about types of retirement plans are true?

I. Under a defined benefit retirement plan, employers promise to make a stated amount of annual contributions to individual accounts established for each employee, and the employee receives the full value of the account upon retirement.

II. Under a defined contribution retirement plan, the employee agrees to purchase a set percentage of employer stock during his working years in order to fund his own retirement. Select one:

a. Both I and II

b. I only

c. II only

d. Neither I nor II

Answer 1

Answer is d - Neither I nor II

Defined benefit retirement plan - an employer-sponsored retirement plan where employee benefits are computed using a formula that considers several factors, such as length of employment and salary history. This is like promising all health care benefits to employee, no matter what the cost of that benefit could be.

Defined contribution retirement plan - employees contribute a fixed amount or a percentage of their paychecks in an account that is intended to fund their retirements. The sponsor company will generally match a portion of employee contributions as an added benefit to help retain and attract top talent. In this, employee would be paid a fixed amount periodically (based on corpus accumulated) after retirement to cover his healthcare expenses, which can be much higher than the amount of benefit received.