Buy an essay on Pension Plan

The development of the society led to the appearance of the concept of pension. The pension is the financial compensation, which is paid to the worker after he or she looses the possibility to get the regular income from the employment. The compensation can be paid by the lump sum, but usually the people and organizations use the plan of monthly payment. Usually the issue of pension plans is in the charge of special governmental financial institutions, large businesses or private financial organizations. The objective of this research is to describe the most popular pension plan, the differences between them, and the methods of their financing.
What is a pension plan as used in a firm and related to employee compensation?
The pension plan as used in a firm and related to employee compensation is known as the defined benefit plan. In the USA any pension plan that is not a defined contribution plan can be specified as a defined benefit plan (26 U.S.C. § 414(j). The differences between the defined benefit plan and defined contribution plan will be described in details below.

buy an essay

Traditionally the amount of pension depends on the employee’s salary at retirement or, for example, the average salary of the highest five years of earnings, the number of the years worked, and multiplied on the accrual rate. (Accrual rate is a “The rate of interest that is added to the principal of a financial instrument between cash payments of that interest” (Investopedia, 2010). The final amount of pension can be paid as a lump sum, but monthly payment is more common.
Due to many factors of influence determining the benefit in a defined benefit pension plan it is very popular among the unionized workers. This category of workers usually prefers working for the same company for many years. The simplest scheme offering monthly payment in the amount of $100 per every year of working in the company (or sometimes industry) provides $3000 per month for the worker with the thirty years of working experience. The common type of pension plan in the USA is a Final Average Plan, or FAP. The main factor determining the benefit in FAP plans is the average salary of employee over the latest years of his career. Usually the pension plan suggests special terms for early retirements, before the attainment of normal retirement age of 65 years.
What is the difference between a defined contribution plan and a defined benefit plan?
To discuss the differences between a defined benefit pension plan and defined contribution pension plan it is necessary to say a few words about the methods of plan funding. According the funding all the DB pension plans are divided onto funded and unfunded. The social security system in the USA uses the unfunded pension plan; this method of financing is also popular in many European countries. Under this plans all the pension are paid with the pension sponsor, the private employee, the large business or the state institutions. These payments are funded of social security contributions and current taxes. The funded plan suggests the existence of special investment fund founded with the contributions from the employer and other plan members. The benefits are dependent of the future returns on investment and can’t be known in advance. However in many countries including the USA the government provides tax incentives to funded plans, so many private benefits plans in the USA are funded.
According to United States Code, “the term “defined contribution plan” means a plan which provides for an individual account for each participant and for benefits based solely on the amount contributed to the participant’s account, and any income, expenses, gains and losses, and any forfeitures of accounts of other participants which may be allocated to such participant’s account. (26 U.S.C. § 414(i).”