Definied Contribution Plan

The first type of corporate pension plan is the defined contribution plan. The defined contribution plan provides employees fixed yearly contributions into a pension fund with the ability to choose where the investments are made. Typically they are invested in stocks or fixed-income securities. A familiar example of this type of plan would be the 401(k) plan. Income at retirement also depends on the size of the fund at that time (Spiceland, Sepe, & Nelson, 2011, p. 937). Most employers prefer the defined contribution plan because of lower costs and less risk than the defined benefit plan. According to Spiceland, et al, (2011) "Today, approximately two-thirds of workers covered by pension plans are covered by defined contribution plans" (p. 937). It is so important especially in the current economy for workers to ensure they are secure at retirement. In an informational article, "Pension adequacy: The challenge for defined contribution pension plans," Gardner, (2011) addresses this security by discussing what can be anticipated at retirement, the adequacy of the defined contribution plan, and who will be most affected. He also gives a breakdown of the performance of defined contribution plans in the past and what to expect for the future. In the beginning of his article, Gardner utilizes a ratio of pension income to pre-retirement salary called the replacement ratio to determine what is considered to be acceptable income at retirement (Gardner, 2011, p. 4). The higher ratio is preferred since that would indicate maintaining at least the same level of income as pre-retirement. It is hard to determine what is truly considered adequate because each person could have a different view as to what is considered acceptable income. Not only does this view fluctuate among workers, but each individual has a different income which is the main factor in determining how much they will earn at retirement. Due to the opposing views and income ranges amongst workers, it is obvious as to why Gardner's research shows such substantial variances in an individual's retirement goals. His study of the past is an example of what would have transpired if defined contribution plans were used. The discoveries indicated that of the four investment strategies used in the study, the lifestyle investment strategy would have provided the best protection against the most severe market crashes, even though the equity strategy would have provided higher income at retirement (Gardner, 2011, p. 8). In the study for the future Gardener analyzed the possible outcomes of workers with various income levels. While most people might argue that the highest income level would naturally have the highest replacement ratio at retirement, the study indicates otherwise. The main reason for this according to Gardner, (2011) is because "state pension benefits provide relatively more support to low-income workers" (p. 10). In this case the