Defined Benefit vs. Defined Contribution
What's in this issue:
All company pension plans are different. Employers design pension plan programs with the unique needs of their employees in mind. If you understand the type of pension plan you have, you’re a step closer to understanding how your group plan can help you reach your retirement goals.
There are basically two types of registered pension plans: Defined Benefit, and Defined Contribution. The key to understanding your plan is all in the name.
Defined Benefit Pension Plan (DBPP) – The income you receive at retirement under a DBPP is predetermined and is usually based on a formula involving your years of service and earnings.
You receive annual statements clearly indicating the benefit on your retirement date. In these types of programs, your company manages the assets – you have no active involvement.
Defined Contribution Pension Plan (DCPP) – The income you receive at retirement under a DCPP is not pre-determined. It’s based on the assets within your individual retirement plan account at the time you retire. In DCPPs, your company makes a contribution based on a formula, which may or may not require you to make some type of matching contribution. These contributions are usually based on a fixed percentage of your salary or on a specific dollar amount and are deposited into an account in your name. DCPPs are popular because they offer you choice and flexibility.
Under a DCPP, you determine which investments your contributions are invested in from a selection of investment options available within your plan. This allows you to create an individual portfolio suited to your own investment goals and tolerance for risk.
The amount of money you have in your group plan account at retirement is based on the amount of contributions made over the years and the earnings these investments have made. Defined contribution plans may also include Group RRSPs and Employee Profit Sharing Plans. Or, they may also include a Non-Registered plan as an option to allow you to save outside of your RRSP. The operation of these plan types is similar to selecting the investment options for allocating contributions.
Whether your plan is a defined benefit plan or a defined contribution plan or a combination of both – which many plans are these days – your group plan is an important part of your retirement investment strategy. Knowing which type of plan you have and understanding how it works will help you determine how it can contribute to your retirement income.
If you have a general question or suggestion about this newsletter, please send an e-mail to email@example.com or write to At a Glance Newsletter, Group Retirement Services Marketing, Sun Life Financial, 225 King Street West, 14th floor, Toronto, ON M5V 3C5.This bulletin has been created exclusively for you. It addresses issues to help you with your financial planning and investments.
Group Retirement Services are provided by Sun Life Assurance Company of Canada, a member of the Sun Life Financial group of companies.