Qualified Plans

Qualified Retirement Plans ## Defined Benefit vs. Defined Contribution: The Foundational Split All employer-sponsored retirement plans fall into one of two structural categories. Understanding this split is foundational for the Series 7. Defined Benefit (DB) Plan — the pension: The employer promises a specific monthly benefit at retirement, typically calculated by a formula such as: > Years of service × Final average salary × Benefit multiplier Example: 2% multiplier, 30 years of service, $100,000 final salary → $60,000/year in retirement income. The employer bears all investment risk. If the pension fund underperforms, the employer must make up the shortfall. Employees receive a guaranteed, predictable income stream regardless of market performance. Defined benefit plans are actuarially funded — an actuary determines the required annual contribution based on projected future obligations. Defined Contribution (DC) Plan: The contribution amount is defined (by the employee, employer, or both), but the eventual retirement benefit is unknown — it depends entirely on investment performance and contribution history. The employee bears the investment risk. Examples include 401(k), 403(b), profit sharing plans, and money purchase pension plans. The 40-year shift from DB to DC plans has transferred retirement investment risk from employers to employees — a major structural change in American retirement finance. --- ## Profit Sharing Plans A profit sharing plan is a defined contribution plan where the employer makes discretionary contributions based on company profitability. Unlike a pension or money purchase plan, the employer is not required to contribute every year — the amount can vary or be zero in a difficult year. Key features: - Annual contributions are discretionary — the employer decides each year whether and how much to contribute - Contribution limit:…