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The following two methods of determining pension benefits are the defined contribution plan and the defined benefit plan. The defined contribution plan is a retirement plan in which the employer usually contributes a set amount to the accounts of their employees each period while the defined benefit plan is a promise of a certain amount to be paid to its employees in the future usually at retirement (Schroeder, Clark, & Cathey, 2017). The risk of future benefits lies with the employees on a defined contribution plan because the employer is only required to make a certain contribution each period, but for employees on a defined benefit plan, the risk and burden is on the employer since a promise of future benefits was made (Schroeder et al., 2017). Employers in industries like energy production, utilities, and certain manufacturers tend to offer the defined benefits plan versus others industries such as construction and retail, where the market is volatile, tend to offer the defined contribution plan (Dunning, 2014). Due to the cost burden, I personally know that many companies are backing away from defined benefit plans, and I have noticed this shift on the news and even noticed the changes at my place of employment. The costs can be too much of a burden because employers must make contributions that are large enough to cover to the future benefits that were promised (Schroeder et al., 2017). Other reasons employers are shifting away from defined benefit plans include confusion by actuaries regarding the estimated worth of benefits versus what constituted good funding targets and the prevalence inadequate funding (Ezra, 2015).
The actuarial funding methods for employees are the cost approach and the benefit approach. These approaches are formulated by actuaries with the intent to help estimate the amount of benefit that companies must pay each period in contributions in order to meet the future terms (Schroeder et al., 2017). For the cost approach, an estimate is formulated based on the total benefits that need to be paid in the future with annual payments made by the employer to fund those potential costs; the benefit approach is formulated through an estimate of the present value of benefits based on an employee’s service to an employer on a year-to-date basis (Schroeder et al., 2017).
I’ve seen some unfortunate situations occur when people who were of retirement age didn’t get what they were promised by their employers due to the company closing or even a lack of knowledge and confusion on what they thought they were supposed to received. In these examples, we as Christians must trust in the Lord even when we don’t understand (Proverbs 3:5, The New Living Translation). We must ask the Lord for wisdom regarding these benefit plans to make sure we understand them so that we can make the best decisions regarding our futures (Proverbs 2:6, The New Living Translation). Finally, companies should behave ethically and properly plan so that they won’t be in the situations where their plans are underfunded.