What is a defined benefit plan & defined contribution plan

Updated : Sep 05, 2019 in Articles

What is a defined benefit plan & defined contribution plan


Congratulations on your new position! You may now be eligible to participate in the new Voluntary Defined Contribution retirement plan, or VDC. You are eligible if you were hired on or after July 1st 2013 by a New York State public employer, which include a New York State public agency, local government, school district, or public benefit corporation, and your estimated annual salary rate is $75,000 or greater, and you are an unrepresented employee. This video will explain the difference between the various New York State public employer defined benefit plans, which include the New York State and Local Retirement System, the New York State Teachers’ Retirement System, and New York City pension plans, such as the New York City Employees’ Retirement System, and the Voluntary Defined Contribution program or VDC. As a new full-time employee, you have just 30 days to decide which plan is best for you. If you don’t make the decision yourself, you’ll automatically be default enrolled in a New York State or New York City defined benefit plan. It’s very important to understand the difference, and this video will describe some key differentiating factors. Both plans are sound financial options for savings for your retirement, but they do have differences. Only you can decide which one is best for you. The NYSLRS, NYSTRS, and New York City Pension plans are defined benefit plans, meaning the amount of money you’ll receive in retirement will be a fixed amount determined by the number of years you’ve worked, how much you’ve earned, and your retirement age. This gives you a predictable secure level of income for life, in the form of a monthly annuity payment, once you retire. Some of the contributions to the plans are made by your New York State public employer based on your tier, hire date and salary. The rest will come from you. You are required to contribute between 3% and 6% of your gross salary annually, depending upon how much you earned. All the investment choices are handled by the plans, and investment returns do not affect the amount you get in retirement. These plans reward your long-term service to the New York State system, and may be a good option, but there is an important thing to consider. The contributions made by your employer don’t become vested or owned by you until you’ve reached a minimum of 10 years of full-time service credit. 20 years of full-time service credit are required to receive the maximum benefit. That means if you’re no longer employed by your employer before vesting, you will not be eligible for a pension benefit, and will receive only the contributions you made yourself, plus interest. That’s potentially a lot of money. The Voluntary Defined Contribution Program is a defined contribution plan, meaning the amount of money you’ll receive at retirement will depend on how much is contributed to the plan over the years, the performance of your investments, and the income options chosen at retirement. Like the Retirement System Plans, you’ll start by contributing between 3% and 6% of your gross salary annually, depending upon how much you earn. These contributions are deducted from your salary on a pre-tax basis. Your employer will also contribute to the plan based on your tier, hire date and salary. If you’re no longer employed by your employer at any time after the 366-day vesting period, all of your own contributions, plus interest, and the vested contributions from your employer are yours to keep. With the VDC, you also have the ability to choose your own investments to reflect your lifestyle and goals, including fixed or variable annuity options that can still supply guaranteed lifetime income with flexible choices and the ability to leave assets to your beneficiaries. You have a choice of four investment providers, each of which offers their own set of investment products and services which you should consider carefully. Choosing between the New York State or New York City Retirement System plans and the Voluntary Defined Contribution Program is an important decision. In a nutshell: Both plans include employer and employee contributions and the ability to keep the contributions you’ve made if you’re no longer working for your employer. Both allow you to own the pension benefit too, but in the case of the New York State or New York City System plans only if you have ten years or more of full-time service credit. Both plans offer fixed income in retirement that is not subject to market fluctuations while the Voluntary Defined Contribution Program also offers variable income based on the performance of your investments. Under the VDC, you have the freedom to choose investments that suit your lifestyle and goals, but not under the New York State or New York City System plans. While you may just be starting a new job, someday you’ll be retiring too, so make the choice that’s right for you. If you need help deciding, contact your benefits representative. Or speak directly with one of the investment providers available in the plan. [Music]

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