Employee Pension Benefit Plans
Employee pension benefit plans are set up by employers to provide a security net for employees. These plans provide a minimum amount of money to the employee when the employee retires. Your employer normally funds all of the pension, though some plans allow employee contributions. Make sure you understand how these pension plans work so you are prepared when you retire.
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Significance
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Some pension plans guarantee a benefit to you when you retire. These guaranteed benefit plans, like 412(i) plans, are entirely funded by your employer. When you retire, the employer pays you the promised benefit. The plan must invest in fixed life insurance and annuity policies so the benefit is insured and guaranteed by an insurance company. Other pensions may promise benefits but the benefit amount is ultimately determined by the underlying investments in the plan.
Benefit
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The benefit of employee pension plans is that your employer has given you a helping hand when it comes to saving money for retirement. You won't need as much money as you would otherwise need for retirement since your employer has partially or fully funded a savings for you.
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Disadvantage
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The disadvantage to pension plans lies primarily with employers. When employers fund pensions like 412(i) plans, the contribution requirements are substantial. The contributions must also be made for long periods of time. Because of this, the employer's finances may be stressed to provide the benefit to employees. If the employer cannot make the pension contribution, the entire pension plan is compromised and employees may not receive their benefits.
Consideration
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You should consider opening up a private retirement plan, like an Individual Retirement Plan (IRA) in addition to having a pension. This assures you that you have your own savings and are not totally relying on your employer for your future retirement savings.
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