Pension Plan Basics

Finding and keeping good employees is a difficult prospect for any business. Yet even small firms can compete in the job market if they know how to use the right benefits to beef up their compensation packages. One way to do this is to offer your employees pension plans.

Types of Plans
Pension plans fall into two major categories: qualified (or tax-qualified) and nonqualified plans. Qualified plans come in two flavors:

• Defined benefit plans. In this type of plan, an employer pays a retired employee a fixed amount, based on a formula that includes such factors as an employee's age, earnings, and years of service. Most employers fund their plans by placing money in dedicated investment funds under the control of professional money managers.
• Defined contribution plans. In this plan, employees contribute to their own pension accounts and assume a share of the investment risk. In some cases, the employer also contributes to the plan, usually by matching the employee's contribution. Some of the most popular retirement plans, including 401(k) plans, fall into this category.