Defined Benefit Plan vs. Defined Contribution Plan

The practice of employee retirement plans has been an innovative revelation for the past decade. More than just “retirement,” companies are looking into such programs to increase employee retention, engagement, and participation. Gone are the days where companies just formalized their retirement plans to be compliant with the law, Republic Act 7641. It’s more about providing better benefits to their people.

With technological advancement and changing employee needs’, defined contribution plans and hybrid plans have started to become popular in recent years. Employee savings programs and even employee loans have started to form part of the retirement plan design. Ultimately, plan designs aren’t a one-size-fits-all approach but rather highly customized based on the client’s objectives. Hence, it’s important to work together with a reliable retirement consultant to help you achieve the goals for the company’s retirement plan.

When setting up a formal retirement plan, the usual considerations would be the benefit coverage and the funding of the plan. Having knowledge of various retirement plan options, as well as the design most suitable for your industry, will help you create the best plan for your organization. 

Retirement plans are classified into two types: Defined Benefit (DB) and Defined Contribution (DC). For DB plans, benefits to be provided for the members are defined by benefit formulas stated in the retirement plan rules. The regulatory benefit under R.A. 7641 is an example of a defined benefit wherein retired employees are provided with 22.5 days of pay per year of credited service. On the other hand, the benefits under DC plans depend on both the total contributions made and the earnings at the time of retirement or separation.

The table below explains the key differences between a DB and a DC plan.

Factors Defined Benefit Plan Defined Contribution Plan
1. Employer Contributions
Flexible and is actuarially determined annually
Fixed contribution rate based on the member’s monthly salary
2. Employee Contributions
Non-contributory to members
Members have the option to contribute a percentage of their monthly salary.
3. Retirement benefits
Dependent on the final salary and the tenure of the employee
Dependent on both the accumulated contributions and the investment performance of the fund
4. Plan administration
Handled by both the trustee and the retirement committee
Recommended to be handled by a third party as it requires ledgering wherein a separate account is maintained for each member to which all contributions and earnings from these contributions are credited

Should you need assistance with setting up, revising, or administering your retirement plan, feel free to email us at proposals@zalamea.ph.

ABOUT THE AUTHOR

Nhemarie Sta. Maria

Nhem is an alumna of University of the Philippines Los Banos with a bachelor’s degree in Applied Mathematics. Today, as an actuarial supervisor with over three years of experience in retirement valuations, she is applying her knowledge and skills to manage and lead her team towards the goals that contribute to the organization’s growth.