Advantages of pension plans
- Pension plans guarantee future benefits for employees when they retire, which will help them plan their future spending.
- For defined-benefit pension plan, the investment return is not based on the performance of the companies’ investment fund or the market, thus employees can get a regular and stable income stream after retirement no matter how economic environment changes.
- For defined-contribution pension plans, employees and their companies make certain contribution to their investment fund and they can even contribute more according to their will, which will decrease their taxable income and deduct more tax.
- Employees can still get retirement benefit even if their companies go broken. Pension Benefit Guaranty Corporation will protect employees’ right.
Disadvantages of pension plans
- Pension plans are more costly compared with other retirement plans.
- Pension plans place financial burden on employers.
- Pension plans do not take future cost adjustment or inflation into consideration, and it is only based on employees’ past earning and working hours.
- Although defined-benefit pension plan promises a regular and fixed income stream after retirement, employees will have smaller earning potential compared with defined-contribution plan. With defined-contribution plans, if employees make extra investment and the fund performs well, they can get more benefit after retirement.
- Employees cannot change investment options within companies’ investment fund.
- Employees have to take excise tax if they have not reached the minimum level of contribution or if they have gone beyond the limitation.
- Employees cannot take loans or early withdrawals from their pension fund.
- Employees cannot make in-service distribution before they reach age 62.
- Employees will get less monthly retirement benefit if they retire early.
- Employers cannot move their pension plan into their own investment.