Pensions A Glossary of Terms
Through these types of plans, employees who work at several different companies throughout their careers will have a retirement income that's similar to the income of employees who work at the same company throughout their entire careers, provided that they are close to the same income level at retirement.
These are plans through which employers pay a specific (or defined) benefit to employees at retirement. Benefits usually are determined by a formula based on the employees' years of experience and pay levels at retirement.
These are plans through which employers, and in some cases employees, make fixed (or defined) contributions. Benefits are paid out to employees at retirement. If an employee leaves the company before retirement, the earned portion of the proceeds is portable. Profit-sharing and 401(k) plans are the most common types of defined-contribution plans.
Pension Equity Plan:
This type of plan offers the security of a traditional pension plan plus portability. It's a final-average pension plan in which benefits are tied more closely to salary at separation from the company than to years of service.
These plans essentially are defined-contribution plans that have cash balances that employees can take with them when they change jobs. Employees are credited with a certain amount of money each year, based on their annual pay. These contributions are compounded, based on a chosen interest rate.
Through these plans, employers come up with a benefit that they think employees should earn at retirement, based on pay levels. Using actuarial tables and certain interest-rate assumptions, the employer then backs into the amount it would have to contribute annually to accumulate the desired benefit by retirement.
Personnel Journal, July 1993, Vol. 72, No. 7, p. 46.