Defined Contribution health plan are becoming the future scope of the small business health insurance. Retirement plans for the employees are basically categorized into two broader section. The first one ideally being the defined contribution plan where the employer, employee or both make contribution on regular basis. The second one is the defined benefit plan. This is often referred as pension, they offer no guarantee whether the employee will be accrued to some benefits and it solely dependent on the investment plan.
Difference between defined benefit Vs Defined Contribution – Which has the better benefits?
The underlying philosophy between defined contribution vs defined benefit small business is that
- Defined Contribution: The individuals accrue the savings during the entire career to be drawn after retirement. They are generally funded by the employees, at the same time the employer also contributes the same amount of that of the employees. So upon retirement, the amount contributed and the accrued interest to the amount can be availed by the employee. 401k is the most prevalent practice of defined contribution plans
- Defined Benefits: It provides the members with retirement income for the lifetime. Same as the defined contribution, the employers and employee both contribute a defined percentage of their income in a pension fund. This will in turn will be payed to the employee as pension during his entire life time. However defined benefits places has some financial risks on the employer because he had to remain employed with the organization for a certain period to get entitled to this pension fund otherwise it would be exhausted.
Summing it up
Defined contribution vs defined benefit can be beneficial at instances because it becomes as kind of savings, a security to the life even after retirement. However there is some investment risk with defined contribution.