Question

Question: Describe the two basic types of pension plans.

Short answer

Answer

Types of Pension plan

1. Defined Contribution Plan
2. Defined benefit plan

Step-by-step solution

Meaning of Pension Plan

A pension plan refers to a system in whichemployers provide employees benefits after retirementfrom the business entity.

Explaining the two basic types of pension plan

a. Defined Contribution plan:

Under this plan, the employer and the employee parties agree to pay a fixed amount according to the terms and conditions of the pension agreement.

b. Defined Benefit plan:

Under this plan, the employee will get the monthly payments from the employer after getting retired. A defined benefit plan consists of an underfunded plan and overfunded plan.