Hybrid Plans

Category: Finance.

A retirement plan is an arrangement to provide individuals with an income or pension during retirement when they are no longer earning a steady income from employment. The time will come when we need to rest from work, not for a vacation, but to live the rest of the years enjoying the savings from previous years of hard work.

Not all our lives that we work to earn a living and survive, you know. Now, this makes the idea of retirement plans great. Retirement plans may be established by employers, the government, insurance companies, or other institution such as employer association or trade unions. Through these plans, retirees will still be able to manage to keep the kind of lifestyle they want on their golden days. The Employee Retirement Income Security Act, covers two types, or ERISA of retirement plans. Among the two types of retirement plans, there are also other types of retirement plans, which are referred to as hybrid plans, such as cash balance plans, combine features of both defined and defined contribution plans.

Defined benefit plans and defined contribution plans. Here are the descriptions of different types of retirement plans: Defined Benefit Plan. For example, 1% of average salary for the last 5 years of employment for every year of service with an employer. A defined benefit plan promises a specific monthly payout at retirement, according to a fixed formula that usually depends on the member s salary and the number of year s membership in the plan. The benefits in most traditional defined benefit plans are protected, by federal insurance, within certain limitations provided through the Pension Benefit Guaranty Corporation( PBGC) . On the other hand, defined contribution plan does not promise a specific amount of benefits at retirement. Defined Contribution Plan.

Instead, it will provide a payout at retirement that is dependent on the amount of money contributed to the employee s individual account by the employee or employer or both, and the performance of the investment vehicles being utilized. The fluctuation of the value of the account is due to the changes in the value of the investments. 401( k) plans, 403( b) plans, employee stock ownership plans, and profit- sharing plans. The employee will then receive the balance in their account that is based on contributions, plus or minus investment gain or losses. Hybrid Plans. They have notional balances in hypothetical accounts where, each year the, normally plan administrator contributes an amount equal to a certain percentage of each participant s salary. A cash balance plan is a defined plan made by the employer with the help of consulting actuaries, a group of business professionals who deal with the financial impact of risk and uncertainty, to appear as if they were defined contribution plans.

A second contribution, which is called an interest credit is also made. Target Benefit plans are defined contribution plans made to match or look like defined benefit plans. These are not actual contributions and further discussion is beyond the scope of this entry. 0. This would only work if all actuarial assumptions are actually realized.