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April 2003, Vol. 126, No.4
Distribution of retirement income benefitsAllan P. Blostin
Benefits under the two kinds of retirement plans offered by U.S. private industry—defined benefit and defined contribution plans—may be distributed to an individual in a variety of ways. Quite often, the individual will have a choice of payment options at retirement. According to a 2000 BLS survey of employee benefits in private industry,1 virtually all employees under defined benefit plans had a joint and survivor annuity available at retirement, a feature that provides a portion of the retiree’s annuity to the spouse after the retiree dies.2 (See table 1.) Approximately three-fourths of the participants with such a benefit were given a choice of various options; for example, 50 percent, 67 percent, or 100 percent of the retiree’s benefit could be provided to the spouse. Although traditionally, defined benefit plans have paid out benefits to the employee and spouse in the form of an annuity, more and more plans in recent years have been offering some type of lump-sum benefit as a payment option. The survey indicated that 44 percent of all workers in defined benefit plans were offered some type of lump-sum benefit option.
Defined contribution plans come in several varieties, and, as with defined benefit plans, their benefits may be distributed in a number of ways. The most prevalent type of defined contribution plan is the savings and thrift plan, followed by the profit-sharing plan and money purchase plan.3 In 1978, section 401(k) was added to the Internal Revenue Code, allowing employees to make pretax contributions into an employer-sponsored defined contribution plan through salary reduction agreements. These types of arrangements are called 401(k) plans.4 Virtually all savings and thrift plans include a 401(k) feature; certain other types of defined contribution plans may include such a feature as well.
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1 This survey, part of the National Compensation Survey, includes data on both full-time and part-time workers in private-sector establishments, regardless of their employment. Prior to 1999, surveys of different employment size classes were conducted in alternating years; medium and large private establishments—with 100 or more workers—were studied during odd years, small private establishments—with fewer than 100 workers—during even years. The 2000 benefits survey provides data on the incidence and characteristics of medical, dental, and vision care, private retirement plans, and other benefits. (For more details, visit the website http://www.bls.gov/ncs/ebs/home.htm.)
2 Under the Employee Retirement Income and Security Act (ERISA) of 1974, defined benefit plans must make a qualified joint and survivor annuity the normal form of benefit payment for married participants. This method of payment provides the surviving spouse at least one-half of the amount of the employee benefit during the course of the spouse’s lifetime.
3 Under a savings and thrift plan, an employee contributes to a fund, generally on a pretax basis. All or a portion of the employee’s contribution, usually a percentage of the employee’s earnings, is matched by the employer, most commonly on a fixed-percentage basis. In a deferred profit-sharing plan, the employer credits a portion of company profits to the individual’s account. Some deferred profit-sharing plans allow employee contributions, but employees are usually not required to make contributions. Under a money purchase plan, the employer makes fixed contributions to an employee’s account. The fixed contributions are usually based on a percentage of the employee’s earnings. Money purchase plans generally do not allow employees to make contributions.
4 For a more detailed description of 401(k) plans, see Marc Kronson, "Employee Costs and Risks in 401(k) Plans," Compensation and Working Conditions, summer 2000, pp. 12–15.
National Compensation Survey - Benefits
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