University management has introduced a defined contribution plan as an alternative to the traditional defined benefit plan. What’s the difference between the two types of plans?
UPTE is committed to resisting this plan for employees covered by UPTE contracts. Our post employment income is part of our deferred income. We don’t want to settle for less and jeopardize our secure retirement.
Following is a description of some of the differences between the two types of post-employment plans.
|Defined Benefit Plan||Defined Contribution Plan|
|Guaranteed benefits, lower risks
• Fixed and predictable
• Based on service, salary and age
• Paid out of a pool of invested assets
|Employees bear all risk for investment losses
• The plan can’t guarantee your benefits
• Can’t deliver the same benefits level with the same level of funding
• Account grows if your investments succeed, but the risk is yours
• The plan is portable if you leave UC
|Better investment returns
• Professional investment management with lower administrative costs
• Managing board of trustees has fiduciary responsibility to employees
• Average 1% better annual returns for a 25% better outcome over 30 years
• From 1975-1999, 70% of the funding for public pension plans came from investment returns
|Worse investment returns over time
• Corporate managers do not necessarily have fiduciary responsibility to employee
• It is up to you to devise money management strategy
• Higher administrative costs for employers and employees
• But there are tax advantages to 401k, 403b, and 457 plans.
|Can provide additional benefits
• Cost of Living Adjustments to retirees’ monthly benefit
• Disability pension benefits
• Spousal benefits
• Guaranteed income to other beneficiaries
• Early retirement benefits
|Provides no additional benefits
• Can’t pay disability benefits
• Can’t pay cost-of-living increases
|Allows supplemental investment
• You can add 403(b) or 457(b) plans, but UC does not match your contributions.
• When you leave UC, you can cash out, or, if vested, you can leave funds in the plan and access them upon retirement. If you cash out, you can withdraw only your contribution
|Reinquishes right to pension
• You give up your right to a pension for UC to contribute to your retirement account
• When you leave UC, the DCP can be shifted to another retirement option, including the money contributed by the employee and UC.
|Allows public employers to attract qualified employees and retain loyal workers, even at lower wages than the private sector.||Does not reward long-term employees|