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The Origins of the Ownership SocietyHow the Defined Contribution Paradigm Changed America$
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Edward A. Zelinsky

Print publication date: 2008

Print ISBN-13: 9780195339352

Published to Oxford Scholarship Online: January 2009

DOI: 10.1093/acprof:oso/9780195339352.001.0001

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How Are They Different? The Defined Benefit and Defined Contribution Formats Contrasted As A Matter of Plan Design

How Are They Different? The Defined Benefit and Defined Contribution Formats Contrasted As A Matter of Plan Design

Chapter:
(p.1) CHAPTER ONE How Are They Different? The Defined Benefit and Defined Contribution Formats Contrasted As A Matter of Plan Design
Source:
The Origins of the Ownership Society
Author(s):

Edward A. Zelinsky

Publisher:
Oxford University Press
DOI:10.1093/acprof:oso/9780195339352.003.0001

Traditional defined benefit pensions have four major characteristics as a matter of plan design. First, they provide income on a deferred basis at retirement and not before then. Second, they provide such retirement income as periodic, annuity-type payments, rather than as single lump sums. Third, they are funded collectively, the employer's contributions being pooled in a common trust fund from which all participants receive their benefits. Finally, the defined benefit format places on the employer (rather than the employee) the obligation to fund the benefit promised to the participating employee. In all four respects, the prototypical defined contribution retirement plan, exemplified by 401(k) arrangements, is today different. The contemporary defined contribution arrangement distributes to an employee when he leaves employment, even if the employee is well short of retirement age. Typically, the distribution takes the form of a single, lump sum payout of the employee's individual account balance.

Keywords:   defined benefit, defined contribution, annuities, lump sums, risks, individual accounts, pensions, retirement, 401(k)

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