Defined Benefit vs. Defined Contribution Plans

My new employer asked me to choose between a defined benefit (DB) plan and a defined contribution (DC) plan for my retirement savings. What is the difference between the two? Which one should I choose?

Both defined benefit and defined contribution plans are sound methods of providing for income needs in retirement. However, there are differences between the two plans, and which one is best for you likely depends on your individual circumstance.

Defined Benefit (DB) Plan

With a Defined Benefit, or DB, plan, employers provide employees a specific retirement benefit based on salary and years of service. Defined benefit plans can be funded exclusively by employer contributions, or require employee contributions. These monies are pooled together and professionally managed to increase efficiency and remove financial risk for the participant. These plans provide a stream of income for life which makes it predictable and allows participants to plan for retirement and feel a sense of financial security. The most common formula to calculate benefits is based on the employee’s earnings at the end of the worker’s career. The employer or government bears funding and investment risk.

Defined Contribution (DC) Plan

Defined Contribution (DC) plans provide a means for both employees and employers to contribute a steady stream of revenue into the participant’s retirement account. A DC plan with a fixed annuity option, like TIAA Traditional, can also supply guaranteed lifetime income. Adding a variable annuity option allows the participant to invest in equities, bonds, real estate and other types of asset classes potentially to earn additional income.

DC plans generally allow participant-directed investments and vest (or allow employees to receive benefits) sooner than DB plans. DC benefits are also portable, which is becoming more important for workers in today’s evolving marketplace where the average worker may switch jobs and even careers multiple times over the course of a lifetime.

In DC plans the rate of employer and/or employee contributions are usually defined as a percentage of salary. How much income a participant receives in retirement will depend on several factors, including salary level, duration of contributions, investment earnings and age at retirement.

TIAA-CREF offers defined contribution retirement plans through your employer. These plans are sometimes referred to as retirement (or group retirement) annuity contracts. Typically, contributions are made on a tax-deferred basis, which means you don’t pay taxes until you take the money out.1

Learn more about defined contribution plans

Choosing the Right Plan

So which one should you choose? Many appreciate the flexibility and portability of DC plans. Another consideration in which plan to choose is the plan you chose at a previous employer. Many employees in higher education already have a DC plan from an earlier job, and it may make sense to continue accruing time and assets in the same plan. The option of receiving both guaranteed income for life through a fixed annuity while potentially increasing your retirement savings by investing in variable annuity equity funds and other diversified asset classes is also a benefit of DC plans.

Contact us for more information on retirement plans and what options may be best for you.


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Annuity account options are available through contracts issued by TIAA or CREF. These contracts are designed for retirement or other long-term goals, and offer a variety of income options, including lifetime income. Payments from the variable annuity accounts [and mutual funds] are not guaranteed and will rise or fall based on investment performance. Mutual funds do not offer the range of income options available through annuities.

TIAA-CREF Individual & Institutional Services, LLC and Teachers Personal Investors Services, Inc., members FINRA, distribute securities products. Annuity contracts and certificates are issued by Teachers Insurance and Annuity Association (TIAA) and College Retirement Equities Fund (CREF), New York, NY.

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1 The fact that TIAA-CREF retirement (or group retirement) annuity contracts are annuities does not provide any tax-deferral advantage over other types of investments offered through qualified plans.

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