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Defined Contribution vs Defined Benefit Plan & Pension Expense

1. What are the differences and similarities between a defined contribution plan and a defined benefit plan? As an employee, would you rather have a defined contribution plan or a defined benefit plan? Why? As an employer, would you rather offer a defined contribution plan or a defined benefit plan? Why?

2. What are the components of pension expense? How is the interest rate determined? Why are prior service costs amortized? How do the components of pension expense differ among the various types of contribution and benefit plans?

3. Under the 'Read Me First' material, it states: 'Congress is considering making defined benefit programs more attractive, including the creation of "defined benefit 401(k)" plans, which would have many of the advantages employees like in 401(k) plans, such as pre-tax employee contributions and matches, but it would pay a guaranteed lifetime benefit.' What are your thoughts on this type of plan?

Solution Preview

1. What are the differences and similarities between a defined contribution plan and a defined benefit plan? As an employee, would you rather have a defined contribution plan or a defined benefit plan? Why? As an employer, would you rather offer a defined contribution plan or a defined benefit plan? Why?

Defined contribution plan, the employer makes contribution to the plan that is generally allocated to the accounts of participant, usually based on participant's compensation. Under this plan when the participant separates from the service, dies, or becomes disabled, or at any other time specified in the plan, he or she is entitled to his or her account balance.

Defined benefit plan, under this plan a participant is promised a specified benefit that is determined under a formula contained in the plan. This formula includes that a ...

Solution Summary

The solution answers 3 questions on the differences between defined contribution and benefit plans and the writer's thoughts on a 401k version of the latter as well as a short explanation of the components of pension expense. Includes a 'Works Cited' section.

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