Pension plans may be differentiated based on the way that risk is distributed. In a defined benefit retirement scheme, an employer shoulders much of the risk and must make investment decisions accordingly. A defined contribution scheme, such as a 401(k) plan, places much of the liability on the plan member, who is usually the employee. To choose the best plan, an individual should decide how much risk he or she is willing to accept. An individual retirement account (IRA) may be appropriate for someone who wishes to take control of his or her own retirement or wants to supplement another similar savings plan.
When choosing a pension, an individual should consider his or her age, salary, year's worked, and desired benefit upon retirement. An administrator should be able to provide some guidance on what a pension benefit may be worth, but there are still unknowns that affect the final benefit, such as stock market performance. Meanwhile, there are certain considerations to make when choosing a pension to produce the highest possible distribution when needed.
Contributions are one way that pension benefits grow, which can be supplemented by investments. Regional laws typically place a ceiling on the maximum amount of money that can be contributed to pensions. A key factor in determining which plan is best suited for an individual may include age. The nearer one gets to retirement, the greater the cash contributions may need to be in order to reach retirement goals.
Sometimes, employers offer staff members a choice on which retirement plan to choose. Employer contributions to one plan might be greater in comparison to another. Finding out what the ratio is for employer cash deposits in comparison to the contributions allowed by plan members can lead to an informed decision throughout choosing a pension. For instance, a plan sponsor might match employee deposits up to a maximum.
Investment performance is the primary driver behind the size of a pension benefit at retirement. When choosing a pension, a defined contribution structure might be favored if an individual is confident about making investment choices. This process involves selecting mutual funds that the retirees money will be directed towards. Pension administrators typically decide the pool of funds from which an investor may choose, but the inherited risk ultimately belongs to the plan member.
When choosing a pension, a plan member might prefer to shift the lion's share of the investment risk on the employer. If one of the options provided is a defined benefit plan, an individual should not expect to make investment choices. Instead, a plan member surrenders the right to make investment choices for the most part, and is subject to the plan's investment policy, strategy, and risk-reward profile.