Defined Benefits vs Defined Contribution Plan Defined Benefits Plan; Defined Contribution Plan; Annuitization; Retirement Wealth
Session Number
Project ID: MATH 05
Advisor(s)
Dr. Feng Liang; University of Illinois Urbana Champaign
Dr. Quiang Wu; Middle Tennessee State University
Discipline
Mathematics
Start Date
19-4-2023 9:20 AM
End Date
19-4-2023 9:35 AM
Abstract
For public sector jobs such as university professors, there are two types of available retirement plans for their retirement package: The Defined Contribution (DC) and Defined Benefit (DB) plan. We will discuss the key differences between these plans, including their structure, benefits, and risks. One critical factor to compare these two plans is the Net Present Value (NPV). NPV is a way of calculating the value of future payments or benefits in today’s dollars. We will compare the NPV offered by the DC and DB plans offered by the Illinois State University Retirement System to determine which plan is more valuable. We found that overall, DB plans came out much than the DC plans, even when the discount rate of the DB plan is 7%, due to the fact that DB plans provide predictable and secure income compared to DC plans However, over short service years, the DC plans are better for employees due to the DB plan’s 5 years of vesting before DB plans can start earning, especially if the DC plan is well managed.
Defined Benefits vs Defined Contribution Plan Defined Benefits Plan; Defined Contribution Plan; Annuitization; Retirement Wealth
For public sector jobs such as university professors, there are two types of available retirement plans for their retirement package: The Defined Contribution (DC) and Defined Benefit (DB) plan. We will discuss the key differences between these plans, including their structure, benefits, and risks. One critical factor to compare these two plans is the Net Present Value (NPV). NPV is a way of calculating the value of future payments or benefits in today’s dollars. We will compare the NPV offered by the DC and DB plans offered by the Illinois State University Retirement System to determine which plan is more valuable. We found that overall, DB plans came out much than the DC plans, even when the discount rate of the DB plan is 7%, due to the fact that DB plans provide predictable and secure income compared to DC plans However, over short service years, the DC plans are better for employees due to the DB plan’s 5 years of vesting before DB plans can start earning, especially if the DC plan is well managed.