The Defined Benefit Difference
Defined benefit vs. defined contribution
How does the defined benefit (DB) pension plan model compare against the defined contribution (DC) pension plan model?
The table below compares the DB model to the DC model:
| | Defined Benefit (DB) | Defined Contribution (DC) | The DB Advantage |
| Philosophy | To provide members with lifetime retirement income. | To help individuals accumulate retirement savings during their active career. | The security of regular monthly income rather than savings. |
| Contributions |
Typically, members and employers contribute a set percentage of the member's salary.
Member and employer contributions are invested in a pension fund and used to pay the member's lifetime pensions.
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Typically, individuals and employers contribute a set percentage of the individual's salary. Monies are deposited in a personal account set up in the individual's name.
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In most DB plans, employers shoulder the investment risk. Under a DC plan, the individual takes on all the investment risk. |
| Investment Decisions | Professionals manage all investments based on strict guidelines established to protect plan members. | Individuals decide how their money is invested, usually based on a range of available investment options. | With a DB plan, members don't have to worry about making investment decisions or tracking investments because a highly qualified investment professional is doing it for them. |
| Income at retirement | Pension income is based on earnings and service in the plan — the more service, the bigger the pension will be. Once member start receiving their pension, they receive it for life.
| The money in the individual's account is used to buy an annuity or transfer to a RRIF (a monthly income stream). The size and length of this income will depend on various factors such as total contributions, investment returns, and interest rates. It is not certain the income will last for life.
| With a DB plan, members can estimate, in advance, what their pension will be. Benefits are pre-defined - members know what they are going to receive. |
| Ancillary benefits | Many DB plans, offer additional benefits such as:
inflation protection
early retirement benefits survivor benefits disability benefits
| At retirement, individuals may be able to buy a lifetime annuity that includes some additional benefits such as inflation protection — but these extras tend to be expensive, which reduces the amount they'll have available to provide an income stream. | With a DB plan, the additional benefits are built in and members don't have to worry about the additional cost of shopping around or an annuity that includes them. |
This document provides a simplified overview of HOOPP's benefits based on the terms of the HOOPP Plan Text at the time of publication. From time to time, HOOPP may amend the HOOPP Plan Text. In cases where the information provided in this document differs from that contained in the HOOPP Plan Text, the HOOPP Plan Text will govern. More details, including the full HOOPP Plan Text and a complete description of the Plan and its benefits, can be found on hoopp.com.
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