Retirement programs are meant to replace employment incomes for the employees upon their retirement. These are in fact the programs that provide the source of income for the retirees, and hence carry utmost importance. There are a number of institutions which may set up retirement programs for the employees. Retirement programs may be offered by the employers, the government, insurance companies, trade unions and some other institutions as well. Regulated by ERISA provisions of the Department of Labor in U.S, retirement programs are defined in tax terms by IRS code.
Types of Retirement Programs
There can be various types of retirement plans. Retirement programs can be classified as Defined Benefit or Defined Contribution, on the basis of how the benefits are determined.
Defined Contribution Plans
Defined contribution plans are the employer-sponsored plans, where every participant has got individual account. The accumulated benefit form these plans depend on the contribution made to the individual account, any investment gains, less any losses and expense charges. The contributions to the individual accounts are invested in the financial market and the returns are credited back to or deducted from the respective accounts. After the retirement of the account holder, the account provides retirement benefits. Some of the popular defined contribution plans can be named as 401 (k), Individual Retirement Account (IRA), and profit sharing plans etc.
Defined Benefit Plans
In the US, the Defined benefits plans are often termed as Pension. This plan uses a specific formula devised by the plan sponsor to calculate the benefits and pays it from a trust fund. Unlike the Defined Contribution Plans, the Defined Benefit Plans do not have individual accounts.
Most of the pension plans are Final Average Pay (FAP) plans where your monthly benefits will be calculated by multiplying the number of years that you worked with the salary at the time of retirement and a certain factor called as ‘accrual rate’. Benefits are paid to the single participants as a Single Life Annuity (SLA) or as Qualified Joint and Survivor Annuity (QJSA) for married.