You might have heard of a pension plan several times now. But have you ever thought what does it actually mean? Basically, pension plan is a kind of retirement plan that requires employer to contribute to pool of funds allocated for the future benefit of their employees. This fund is then invested on behalf of the employer and earnings on investments are generating income to the employee upon the time they have or want to retire.
On top of the required contributions for the employer, there are pension plans that also have voluntary investment component.
Pension plan might let workers to contribute a portion of their current income from wages in an investment fund in order to assist in funding a retirement. The employer then matches the portion of the annual contribution of the worker to a certain percentage or perhaps, a dollar amount.
Types of Contribution
As a matter of fact, there are two kinds of contribution and these are:
- Defined benefit plan – here, the employer has to guarantee that the employee gets set amount of benefit upon their retirement no matter what the performance is for the underlying investment pool.
- Defined contribution plan – for such, employer is making specific plan contribution for employees, normally matching the contributions made by employees. The final benefit that the employee will receive will be based on the investment performance of the plan.