Defined Benefit vs. Defined Contribution Retirement Plan
There are important differences between defined benefit pension plans like the ILPF and defined contribution plans such as 401(k)s and IRAs.
Participants in a defined benefit plan have the ability to calculate in advance exactly how much they can expect to receive every month once they retire. That’s because the benefit is calculated on a fixed formula that takes into account factors such as contribution levels and/or years of service. Participants in the Inter-Local Pension Fund can calculate how much they will receive once they retire based on the dollar amount that they contribute each pay period. Retired ILPF participants can count on receiving the same monthly check whether they live to be 66 or 106, and cannot outlive their benefit.
This sets the ILPF apart from defined contribution plans such as 401Ks and IRAs, which provide no guarantees that retirement savings will last — or that poor investments or a plunge in the market won’t wipe out years of savings. There are a lot of unknowns with defined contribution plans and the amount available upon retirement depends on a number of factors: the individual investment selections made, market conditions, how long a retiree lives, and the amount paid in annual administrative and investment fees to fund managers. With a defined contribution plan, once the money is gone, the benefits stop — regardless of age.
Furthermore, participants in a company-sponsored 401(k) cannot continue to contribute to the plan if they leave their employer. That is not the case with the ILPF. Your right to continue to participate in the ILPF does not depend on keeping your job with your current employer. You can continue to participate in the Inter-Local Pension Fund as long as you work in the same industry and maintain your membership in the Teamsters Union.