TOPIC 2 employer sponsored plans

professor penny

A defined benefit plan, also referred to as a pension, is a retirement plan in which employers provide guaranteed retirement benefits to employees based on a set formula. That formula typically includes years of service and annual compensation.

Learning goals

By the end of this topic, you should be able to:

Explain the difference between defined-benefit and defined-contribution plans
Identify plans offered by employers
Define vesting

section outline

Topic 2 Employer Sponsored Plans

Content Videos

The Gus A. Stavros Center for the Advancement of Free Enterprise and Economic Education at Florida State University is pleased to offer these resources. They were created by Teaching Professor Joe Calhoun.

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Part a

Part b

Part c

key point

For many people, most of their saving is through an employer sponsored plan such as a 401(k).

Certified peer mentors

Mentors give presentations to groups about our topics. They also assist other students in personal finance matters and answer questions during individual meetings. To schedule a presentation or an appointment to discuss your situation email coss-financialpeermentor@fsu.edu or visit the Stavros Center financial wellness page.

a topical story

Jamal zipped up his backpack and stood up from Ethan’s couch. He and Ethan had spent the afternoon constructing a schedule for their organization meeting that day. Ethan stayed on his laptop, still working.

“Dude, come on. We’re the ones conducting this meeting today, remember? That means we can’t be late,” Jamal said.

“Chill out, I’m just trying to look over my retirement plan,” Ethan said.

“Retirement? Right now? Our meeting is starting soon! Besides, you’re barely an adult,” Jamal said.

“Not according to my job,” Ethan replied. “It’s an employer plan, meaning my boss makes all the contributions to it.”

“I thought the employee was supposed to make all of the contributions,” Jamal said.

“You see, that’s what I thought, but when I got hired, my boss explained the difference between defined benefit and defined contribution,” Ethan said. “I guess I should’ve looked it up for myself, but he didn’t mind. From what he told me,” he continued, “there’s the retirement plan that the employer contributes to. That’s defined benefit. Then there’s the type where both the employer and the employee make contributions to it. That’s defined contribution. Like with a 401(k) for example, the employee and the employer contribute to it.”

“I get that the employee contributes to their own 401(k), but what does the employer do exactly?” Jamal asked.

“Apparently, some employers match whatever the employee contributes up to a defined limit. I looked it up and that’s like if you were to contribute a dollar, they’ll match that dollar and put it in your plan. But that’s contingent upon a certain percentage and it really depends on the employer,” Ethan explained. “Not to mention, it’s the employee’s responsibility to manage it all.”

“So, with plans like a 401(k), the employee does most of the work and the employer may match according to how much the employee puts in. But then the type of plan you have sounds like more work for your employer,” Jamal stated.

“Yep! Low responsibility for me, which is nice,” Ethan said, closing his laptop and packing his backpack. “Though, I still have to worry about vesting,” Ethan said.

“Vesting?” Jamal asked.

“Yeah, it basically is the right to the retirement plan benefits. That right isn’t given to the employee until they’ve worked a certain number of years. Like with matching, some companies don’t allow the employee the right to take all of the matched values until they’ve worked long enough for it,” Ethan explained.

“You don’t have to worry about that though, right?” Jamal asked. “Since you said your retirement plan is managed by your employer and not you.”

“That’s right. I don’t have to worry about that specifically, but I don’t remember what plan benefits my employer provides. I would know if you didn’t make me shut off my laptop,” Ethan said.

“Hey, I’m just trying to get to this meeting on time,” Jamal said with a shrug.

“Anyway, it’s a good plan to have, especially knowing that you have time to grow it,” Ethan said.

“What about taxes? Wouldn’t you get taxed on all of this?” Jamal asked, walking out of the door.

“Well, I do, but it gets taxed all at the end. As soon as I’m able to take out the money, which would be when I’m like super old, they’ll tax it all right then,” Ethan said, following Jamal without locking the door behind him.

“Oh, that makes sense,” Jamal said. “Also, Ethan, you gotta stop leaving your door unlocked when you leave. You’re basically leaving it open for anyone to come in and steal stuff.”

Ethan shrugged. “It’s fine, it’s not like anything has happened before.”

“It’s still not safe,” Jamal chided. “Imagine coming back to your apartment to see people already inside.”

“I think that would be pretty cool, actually,” Ethan said.

“Whatever,” Jamal said. “We’re coming back here after the meeting, right?”

“If that’s cool with you, then sure. Maybe we can watch a movie or something, I don’t know,” Ethan suggested.

“I’m sure we’ll think of something,” Jamal said as the two headed to their meeting.

(Story created by Jasmine George, Ana Siqueira, Courtney Swanson and Alex Thompson)

related books

These books have a chapter directly related to this topic. Please read them for more details.

Chapter 10: Ramsey, Dave. Dave Ramsey's Complete Guide To Money. Ramsey Press, 2012.

Chapter 6: Hogan, Chris. Retire Inspired: It's Not an Age, It's a Financial Number. Ramsey Press, 2016.

Chapter 4: Bach, David. The Automatic Millionaire, Expanded and Updated: A Powerful One-Step Plan to Live and Finish Rich. Crown Publishing Group, 2016.

Chapter 6: Orman, Suze. The Road to Wealth. Penguin Publishing Group, 2010.

Chapter 16: Lowry, Erin. Broke Millennial: Stop Scraping By And Get Your Financial Life Together. Penguin Publishing Group, 2017.

Five From the Field

Travis Hadwin is a founding partner, senior vice president, and wealth manager for Steward Partners Global Advisory. Based in Clearwater, FL, you can learn more about Travis and his company here: https://www.stewardpartners.com/index.html

In this video interview, Travis answers the following five questions:

If given a choice, should an employee choose a defined-benefit or defined-contribution plan?
How often can employees make changes to their defined-contribution plans?
If a new employee expects to be with the company only a short time, should they still enroll in an employer-sponsored plan? If yes, why?
Can an employee move their funds from one employer plan to another employer plan, or does the transfer have to go into an individual rollover plan?
What is a common mistake people make when enrolling in an employer sponsored plan?

additional resources

https://www.daveramsey.com/blog/types-of-retirement-accounts

https://www.youtube.com/watch?v=tP4zWCS4dMM

IRS plan limits: IRS_retirement_limits_2020.pdf

https://www.annuity.org/financial-literacy/

other books

Malkiel, Burton. A Random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing. W. W. Norton & Company, 2020.

Wood, William. Getting a Grip on Your Money: A Plain & Simple Christian Guide to Managing Personal Finances, Eliminating Debt, Spending, Saving & Giving, Investing for the Future. Intervarsity Press, 2002.

Bach, David. Smart Women Finish Rich, Expanded and Updated. Currency, 2018.

Bogle, John. The Little Book of Common Sense Investing: The Only Way to Guarantee Your Fair Share of Stock Market Returns. Wiley, 2017.

Clason, George. The Richest man in Babylon. Dauphin Publications Inc., 2018.

Hill, Napoleon; Arthur R. Pell. Think and Grow Rich: The Landmark Bestseller Now Revised and Updated for the 21st Century. TarcherPerigee, 2005.

Lynch, Peter; John Rothchild. Beating the street. Simon & Schuster, 1994.

Kobliner, Beth. Get a Financial Life: Personal Finance in Your Twenties and Thirties. Simon & Schuster, 2017.

Orman, Suze. The 9 Steps to Financial Freedom: Practical and Spiritual Steps So You Can Stop Worrying. Currency, 2006.

Bach, David; John David Mann. The Latte Factor: Why You Don't Have to Be Rich to Live Rich. Atria Books, 2019.

Hogan, Chris. Everyday Millionaires: How Ordinary People Built Extraordinary Wealth―and How You Can Too. Ramsey Press, 2019.

important government sites

Federal Regulation:

The Internal Revenue Service is the nation's tax collection agency and administers the Internal Revenue Code enacted by Congress (Links to an external site.)

The Federal Trade Commission protects consumers and competition by preventing anticompetitive, deceptive, and unfair business practices (Links to an external site.)

The mission of the SEC is to protect investors; maintain fair, orderly, and efficient markets; and facilitate capital formation (Links to an external site.)

The CFPB is committed to providing consumers with up-to-date information and resources to protect and manage their finances (Links to an external site.)

(Links to an external site.)Other:

Social Security Administration (Links to an external site.)

Department of Education (Links to an external site.)

State of Florida

ECO 3041

ECO 3041 Personal Finance is a 3 credit hour course offered in-person and online each fall and spring semester. The purpose of the course is to provide you with the specific content knowledge of personal finance and to give you opportunities to start using that knowledge to create good habits, make better financial choices, and live a more fulfilling life. It covers material for all 33 topics listed here. See Professor Calhoun's most recent syllabus here. ECO_3041_SP21.pdf

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To schedule a presentation or an appointment with a certified peer mentor to discuss your situation email coss-financialpeermentor@fsu.edu or visit the Stavros Center financial wellness page.