Having a basic understanding of the two main types of retirement plans is a good idea, especially if you are considering a Massachusetts divorce. Read more about the differences between plan types, including 401k plans and traditional pensions.
What is a Qualified Retirement Plan?
A qualified retirement plan is one that satisfies numerous requirements set forth by the IRS and ERISA, the Employment Retirement Income and Security Act of 1974. These plans take advantage of a number of tax benefits. The two main types of qualified retirement plans, defined benefit and defined contribution, are both subject to equitable division during divorce in Massachusetts under Mass. Gen. Laws c. 208 s. 34.
Defined Benefit Retirement Plans
A defined benefit plan is what we consider the typical company pension plan, although these plans are joining the endangered species list for many Americans. Employees do not make individual contributions to these plans, leaving the employer to make all contributions and administer the investments. Employer contributions are usually determined by factors such as years of employment, wages, and age. Benefits are not normally paid until regular retirement age, and are distributed in the form of a lifetime annuity, although some plans allow the option of lump sum distribution. This type of plan is more involved to accurately value, requiring a formula and usually the services of a pension expert or actuary.
Defined Contribution Retirement Plans
Defined contribution plans have a contribution which is defined, or set, but the final benefit is unknown. In these plans, such as a 401(k) or 403(b), each participant has an individual account. Factors such as the amount contributed by the employee and the amount of company match, if any, and the investment performance over time determine the plan balance over the years. In this type of plan, investment risk may rest squarely on the shoulders of the individual employee since most plans have a number of different investment options.