Personal Finance

What are the major differences between DB and DC plans?

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  • Jun 4th, 2008 1:36 pm
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[OP]
Newbie
May 29, 2008
19 posts
Toronto

What are the major differences between DB and DC plans?

What are the major differences between Defined Benefit and Defined contribution plans?
DB-contribution is unknown, benefit is defined and
DC-contribution is defined, benefit is unknown?
What else?
6 replies
Deal Addict
Mar 31, 2003
4049 posts
13 upvotes
Cambridge
In real-life DB can work out better if you are a career-person, getting promotions. With DC you'll get contributions to the plan based on your pay as you go, which means that a lot of it will be based on your newbie pay. Let's say you score a good promotion in your last 5 or so years on the job, with DB you retire with a pension that befits the vice-president, not the mail clerk.

Of course it depends on the structure of your exact plans, your company may have watered down the DB to take care of this.

DC is good if you don't plan on staying until you retire, or if your wage expectations are pretty much flat.
Deal Addict
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Apr 29, 2002
3812 posts
27 upvotes
Mississauga
DC is also good - if you leave the company, HR transfers your DC porfolio to your new employer.

DB (the old one) was more preferred as it guaranteed a certain level with inflation. DB usually isn't available anymore.
Member
User avatar
Dec 3, 2006
354 posts
6 upvotes
Toronto
lilyc wrote:
Jun 1st, 2008 4:30 pm
What are the major differences between Defined Benefit and Defined contribution plans?
DB-contribution is unknown, benefit is defined and
DC-contribution is defined, benefit is unknown?
What else?
Defined Benefit - Contribution is known and Benefit is defined

Defined Contribution - Contibution is known and Benefit is based on your choice of investments, the onus is on you to makes the finanical decisions for your retirement

DB - more expensive for your employer to maintain since the benefits are guaranteed and investments are your employer's responsibility (usually a third party company that holds the company's pension fund)... your employer is responsible for the funds in the pension pool...
....the contribution portion is usually known, it may change, but you would be advised of the % you are contributing and the % your employer is matching.... also the pesion benefit is dependent on the years of service, highest paying years etc (there's a formula for this, not sure if it varies by company or is a standard)

DB is good if you're a "lifer" at a company. If you leave your employer, you will have a few options, you can take the pension funds a lump sum which will be transferred into a Locked-In rsp plan at the FI or Ins co of your choice, you will have to invest these funds..

or you may have to option to leave the funds with the existing provider, and when you are eligible to receive your pension, it will disbursed to you based on a formula that determines what you are entitled to..

DC - your contribution + your employer's contribution = you invest in the funds that are avaible to purchase throught the companys that is holding the pension funds on behalf of your employer..you are responsible for this portfolio

if you change employers, you may be able to transfer the pension to your new employer depending on their benefits that they offer
[OP]
Newbie
May 29, 2008
19 posts
Toronto
Thanks for your great contributions! And can anyone explain a little bit more about the key differences between Registered Pension Plans (RPP) and Registered Retirement Savings Plans (RRSP)?
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Aug 12, 2007
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lilyc wrote:
Jun 3rd, 2008 5:09 pm
Thanks for your great contributions! And can anyone explain a little bit more about the key differences between Registered Pension Plans (RPP) and Registered Retirement Savings Plans (RRSP)?
RPP's are employer sponsored pension plans (either DC or DB). RRSP's are individidual retirement savings plans that you setup up yourself. The money you put in an RRSP is deducted directly from your taxable income, and you are permitted to contribute up to 18% of your earned income in RRSP's (less if you are also in an RPP). All gains/interest accumulated in an RRSP is also sheltered from taxes. You pay tax on the amount you withdraw (usually in retirement). Any unused contribution room can be carried forward indefinately until the age of 71.

Anyone who earns income in Canada may have an RRSP, but not all Canadians work for companies that have pension plans (RPP's). This is why pension plan members cannot contribute as much to an RRSP (i.e. pension adjustment). It's an attempt at leveling the playing field for all Canadians.
[OP]
Newbie
May 29, 2008
19 posts
Toronto
Thanks for your informative reply!

The RRSP unused contribution room can carried forward till age 71, how about RPP? I know some RPP plans allow you to buy service for previous years if you joined the plan later, is this tax deductable? what's the limitation?
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