What is a Defined Benefit Plan? [And Why It’s Important]

What is a Defined Benefit Plan? [And Why It’s Important]

Do you offer a defined benefit plan to your workers?

As of late, I keep running into employees that are all asking about them.

Not without reason, of course.

Employee perks and benefits are more competitive than ever.

In fact, they are the most important forms of compensation for staff.

Not offering an attractive benefits package to your employees is like giving them a slap in the face.

The stats don’t lie: The American Institute of Certified Public Accountants recently released a telling report. In it, they revealed that 80% of staff prefer to stay in a job that has great perks than accept another one which has a higher base pay but offers no benefits.

This means that your staff cares about the pluses of working with you. Therefore, you need to select a benefits plan that they will appreciate.

Considering defined benefit plans? This guide will cover everything about this plan that you need to know.

Excited to dive in? We are.

What is a Defined Benefit Plan?

A defined benefit plan is a type of employer-sponsored plan offered to workers that assure them a fixed amount of money payable to them when they retire.

What is a Defined Benefit Plan

In effect, a company bears the responsibility for its staff’s retirement income.

Because employees gain access to these funds when they retire, this type of plan is also called either a defined benefit pension plan or a qualified-benefits plan.

We call them ‘defined benefit’ plans as both employers and employees can calculate these benefits ahead of time.

These plans help retirees by giving them a steady source of income when they have retired. After all, money from Social Security can only go so far.

How Does A Defined Benefit Plan Work?

As I mentioned, because defined benefit plans are sponsored by the employer, he or she has to manage the entire plan.

That means doing the following:

  • Handling all investment decisions (management)
  • Taking care of investment risks
  • Managing all other beneficiary risks
  • Paying for any mandatory expenses for the upkeep of the plan

Government and public agencies are the main entities which offer a defined benefit plan. That said, there are private companies which do give businesses the option of setting up this type of plan with them.

Defined Benefit pension Plan--1

Under these plans, there are several factors which affect the amount that employees are entitled to receive upon retirement. A worker’s age, length of employment at your firm, and amount of money earned while working with you all affect their payout.

Calculating a Defined Benefit Pension Plan

Employers use a formula to determine the amount owed on a defined benefit pension plan.

While these formulas will vary from organization to organization, usually, employers average either the beneficiary’s earnings while employed with them or just their earnings during the last few years of their contract.

A percentage is taken out of that average and multiplied by the number of years that that employee has worked with you.

Whatever amount that is calculated is the amount that the worker will receive.

Having said that, there are many plans which garnish the benefits that employees receive on their pension plans if they are also receiving social security benefits.

Types of Defined Benefit Plans

There are different variations of defined benefit plans that you can consider offering your staff.

They are classified based on a few factors. These include two things; (1) the number of employers who allocate pensions for their staff via a pension plan and (2), whether assets and plans are shared.

Here are the types of defined benefit plans:

Single-Employer Plan – This plan is self-explanatory. It caters exclusively to providing pensions to employees who registered with only one employer.

Agent Multiple-Employer Plan – This defined benefit pension plan focuses on maximizing assets for investment purposes. Employers team up and pool their assets together. That said, each individual employer maintains a separate account in order to comply with their pension benefit obligations.

Cost-Sharing Multiple-Employer Plan – This type of pension plan works almost like an agent multiple-employer plan. The key difference is that employers can access the combined assets of all employees to cover the pension plan expenses for their staff.

Defined Benefit Plan vs Defined Contribution Plan

It’s common for people to mix up a defined benefit plan with a defined contribution plan.

Defined Benefit Plan vs Defined Contribution Plan

That’s because they are similar in how they work.

A defined contribution plan does not guarantee any set of benefits to an employee.

While regular contributions are made under this plan, the key difference is that with defined contribution plans, employees are the ones who assume all the risk related to investments.

The most common type of defined contribution plan is the standard 401(k).

With these, employees pool together portions of their earnings until that amount grows over time.

At times, employers may pitch in and match their own employees’ contributions. That said, they don’t have to do that.

When it comes down to it, defined contribution plans are all about the investments that you and your staff put into them. What you reap is what you sow.

What is a Frozen Defined Benefit Plan?

Employers may decide to “freeze” the defined benefit pension plan that they offer to their staff.

By “freeze”, I mean that the company either puts a partial or complete hold on the accruement of benefits.

It’s common for businesses to freeze their plans when they’re weeding out a plan that they no longer want to implement.

There are two types of freezes: soft freezes and hard freezes.

In a soft freeze, a new employee cannot derive any benefit from the plan. However, workers who had already signed up for the plan before the freeze took place still accumulate benefits.

On the other hand, in a hard freeze, not only do employers close off the benefits plan to new employees, but they also put a stop to any benefits accrual.

In light of this, it’s always wise for employees to have a backup plan. As the employer, you should also do your part and inform your staff about this possibility.

That way, you show that you are transparent with your operations and that you care about your staff, a concept known as employee appreciation.

Is a Defined Benefit Plan Worth it?

If you’re wondering why you should go through the hassle of instating a defined benefit plan, I’ve got news for you: you’re not alone.

Many employers are unsure as to whether having one is the right thing for their business.

The answer?

Don’t waste your time.

You see, about 50 years ago, you could have made an argument for these types of benefits plans.

The norm was for employees to remain at a company for their entire professional lives.

It was uncommon to hear cases of professionals hopping from job to job.

Since then, the working world has changed.

Today, there aren’t many businesses that can boast about having a non-existent turnover rate.

Stats from the US Bureau of Labor Statistics show that in as recent as June 2019, 7.3 million job openings were on tap.

Compare that to the reported 2.3% quits rate and 1.1% rate for discharges or layoffs.

As small as these numbers might seem, they pack a heavy punch.

A report from the Work Institute discovered that losing an employee can cost you on average $15,000 in the money you invest in having to train a replacement, among other things.

But why are employers leaving companies so soon?

It’s About their Benefits’ Package

The same report published by the Work Institute revealed that 9% of employees left their jobs because they were not satisfied with their benefits and compensation packages.

The report ranks these packages as one of the main reasons companies have such a high employee turnover.

Hence the reason compensation management is so important.

In business, it’s pointless to offer your staff a benefits package without first assessing what they want the most.

After all, your offers should be both attractive and relevant to your employees if you want their nod of approval.

That is why including some type of student loan repayment plan within your benefits package is what every employer should be doing.

The reason is simple.

Forbes lists student loan repayment as the hottest benefit that an employer can offer.

It’s no secret that student loans affect loads of employees.  Chances are, one of your staff has already confessed to being bogged down by one student loan payment or another.

If not, you can expect it to happen sooner or later.

Here’s what you can do to meet your employees’ student loan needs and help your employee retention.

Partnering with FutureFuel

The best perk that you can add to the benefits package that you give your employees is something that tackles student loans head-on.

FutureFuel is a company that helps employers offer student loan repayment assistance as part of their company’s benefit package.Laurel Taylor is the reason for this company’s existence.

For years, Laurel was an active contributor on the Student Debt Task Force. Now, with her company, FutureFuel, she is lending her voice in another way.

FutureFuel offers a fast-tracked path for employees looking to clear themselves from student debt.

Here are some of the ways that this company helps both you and your employees:

  • Return-On-Investment Calculators designed to adapt to your business’ needs.
  • Drops interest rates on student loans by as much as 1.7%.
  • Calculates employee turnover costs using their Employee Churn Cost Calculator.
  • Safely and securely stores both your business’ data as well as that of your staff.
  • Easily maneuver through the daunting world of student loan payments with a user-friendly interface.

The team at FutureFuel is serious about getting rid of debt. In fact, they’re so serious that they’re working to eliminate as much as $30 billion worth of student debt by 2021.

Defined Benefit Plan – The Verdict

All in all, offering a defined benefit plan to your employees isn’t the best way to keep them happy.

Instead, you should focus on an incentive that most if not all of them will appreciate: helping them pay off student loans fast.

Aligning your company with a trusted brand like FutureFuel is in your best interest.

They will get the job done and make your employees’ lives much easier.

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