Pension Plan 101

What Is A Pension Plan

Sonny M. Foster

ACC 407: Advanced Accounting

Instructor Elizabeth Bracken

June 20, 2011

What Is A Pension Plan

We go are whole lives working and taking care of our families. The careers that we chose ultimately decide how we will be able to provide for our wives, husbands, children, grandchildren, and parents. What most Americans give little thought to is how we will take care of ourselves after our jobs have all gone away. Stop and think, what will happen to you once you retire and no longer have a job to go to? This is where pension plans come in. Employers use these plans to help employees set up their retirement. It’s always good to have a plan, and pension plans can be one of the best ways to plan ahead for your future. In this essay I will explain pension plans, and the accounting involved.

There are two main types of pension plans that are used today. First we have the defined contribution plan. With this plan an account is set up for each participant in the plan. Every year there is a fixed maximum amount that you can contribute into the plan. Hence the name “defined contribution”. The amount of money contributed into this plan is not based on any expected retirement benefit. Each year the contributions are invested and in the end the retirement income is determined by the amount of money in your individual account. Basically if your investments are successful you will have more retirement money available to you, if they are less then you hoped then your retirement income may fall a little short. The most commonly recognized type of defined contribution plan today is the 401(k). Employers to entice people to work for their company use this plan. Most employers will offer a contribution less than or equal to an employees contribution to their 401(k).

The second type of pension plan is the defined benefit plan. This plan is similar but defers from the first because it is set up to pay a fixed annual...