Question

The company has a defined benefit pension plan. You are reviewing the pros and cons of defined benefits plans to see if you should supplement your company retirement plan with a 401 K. Keep in mind a 401 K is a defined contribution plan. What are the advantages and disadvantages related to defined benefits pension plan? What are the risks (if any) for this type of retirement plan? Would you consider supplementing your retirement by adding a 401 K ?

Answer 1

Defined benefit pension plans offer stable income but can suffer from inflation, while 401(k) plans offer growth potential and portability. therefore supplementing a defined benefit plan with a 401(k) can help ensure financial security during retirement.

Step-by-step explanation:

The company has a defined benefit pension plan. Defined benefit plans assure retirees a specific income upon retirement providing stability and predictability in financial planning. however, these plans often do not track inflation, leading to a potential loss of purchasing power over time. Supplementing with a 401(k) a defined contribution plan can help mitigate this risk.

A 401(k) allows both employee and employer to contribute, and funds are invested in a range of vehicles. These contributions are tax-deferred and the plan is portable, which means it allows for continuity even when changing employers. Moreover, investment returns in a 401(k) could outpace inflation, providing adjustment for cost-of-living increases that defined benefit plans may lack. considering the potential inflation risk to fixed-income retirees, supplementing a defined benefit plan with a 401(k) can be a prudent decision. A 401(k) offers flexibility and the possibility of growth, characteristics that are crucial for long-term retirement security.