What Is a Corporate Pension Plan?

A corporate pension plan is a benefit that provides income in retirement based on the employee's length of service to the company and salary history.

Pension plans for American workers have become rare outside of government employment. According to the Bureau of Labor Statistics, in 2022, the percentage of state and local government workers who had access to a workplace retirement plan was approximately 86%. Of those workers, about 75% participated in a pension plan, and an estimated 19% had another type of retirement savings plan.

Currently, the best access to pension plans in the private sector is via very large companies; however, pensions in corporate A💖merica are disappearing rapidly. In 2022, only 15% of private-sector employees had pension plans; they are being replaced by the popular 401(k) and other defined-contribution plans.

Understanding Corporate Pension Plans

Typically, pension plans have a vesting period that requires employees to work for the company for a minimum number of years before becoming eligible. The individual benefit is based on the employee's length of service and salary history with the company. In the past, employers were wholly responsible for contributing to the plan, but this is becoming increasingly rare.

Two of the most common types of pension plans are the 澳洲幸运5官方开奖结果体彩网:defined-benefit plan and the 澳洲幸运5官方开奖结果体彩网:defined-contribution plan. The defined-benefit plan rep♛resents a traditional approach to pensions, and the defined-contribution plan is the model that has been wid🔥ely adopted in recent years.

The Defined-Benefit Pension Plan

In a defined-benefit plan, the company commits to a specific payment amount for the lifetime of the employee. The benefit is calculated in advance of the employee's retirement, using a formula based on the employee's age, length of service, and salary at retirement. In the U.S., the maximum retirement benefit permitted under a defined-benefit plan in 2024 is $275,000, increased from $265,000 in 2023; the maximum benefit is subject to 澳洲幸运5官方开奖结果体彩网:cost-of-living adjustments (COLA) in future years.

Defined-benefit plans may be funded exclusively by the employer or jointly by the employer and the employee. The pension fund is financed from a pool of funds from which periodic payments to retired employees are made. The payouts are based on a formula that calculates the contributions needed to meet the defined benefit. The formula factors in the employee's life expectancy, normal retirement age, possible changes to interest rates, and yearly retirement benefit amount.

The Defined-Contribution Pension Plan

Defined-contribution plans don't guarantee a set benefit amount. Contributions are paid into an individual's account by the employer, the employee, or both. The contributions are invested, and the 澳洲幸运5官方开奖结果体彩网:returns on the investment (ROI) are credited to the employee's account, or debited from it if there are losses. In the U.S. the best-known defined-contribution pension plan is the 澳洲幸运5官方开奖结果体彩网:thrift savings plan (TSP), which is open to federal employees and members of the Armed Services.

The payout from this plan depends upon the success of the investments made for the pension plan. Upon retirement, the member's account provides the retirement benefit, usually through an annuity, and the payments fluc🌜tuate with the 𒆙value of the account.

Defined-contribution plans have become widespread in recent years and are now the dominant form of retirement plan in the private sector in many countries. The number of defined-contribution plans in the U.S. has been steadily increasing, as employers find them to be more affo🦋rdable than defined-benefit plans.

Special Considerations

Starting in 2020–with the passage of the  by the U.S. Congress–new rule changes for retirement plans kicked in. The new ruling made annuities within defined-contribution retirement plans more portable, meaning that for those who change jobs, the annuity can be transferred to another retirement plan at your new job.

However, the SECURE Act removed some of the legal risks for annuity providers, such as insurance companies, placing limits on when an account holder can sue the provider if they fail to𓆉 make the🥃 annuity payments.

Also, the Act eliminated the stretch provision for beneficiaries of inherited retirement accounts. In the past, beneficiaries of an inherited IRA could take the required minimum distributions each year, stretching out the length of time that the funds would be depleted. Under the new ruling, non-spousal beneficiaries must distribute 100% of the funds in the inherited retirement account within 10 years of the owner's death. However, there are exceptions to the ruling as well as other changes. It's important for investors to consult a financial professional to determine if the new rules impact their retirement strategy and designated beneficiaries.

The Bottom Line

Corporate pension plans can use a defined-benefit, defined-contribution, or hybrid method to manage your retirement funds. While still popular, pension plans are less common in the private sector, having been mostly replaced by 401(k) plans. Understanding your plan type, vesting period, and benefit terms allows you to calculate your current and future benefit based on your salary history and age.