The qualified plans can be classified as either defined benefits or defined contributions (Mathis et al., 2013, p. 459). The defined contribution is a retirement plan where the employee, employer, or both make contributions with no promised payout of future funds. In contrast, the defined benefits plans offer automatic payouts upon the employee retirement, at employer set formula that factors the years of service and salary scale. The defined benefits plans are most common and are preferred by the employees.
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The defined contribution plans involves the employee and employer contributions, upon which the contributions are invested at the discretion of the employer (Mathis et al., 2013). However, the capital gains and losses affect the contributions. When the employer retires, s/he receives the balance on the account after the employer has factored the effects of capital investments. The value of the defined contributions plans are often affected by the changes in the investments and market conditions. Most employees would prefer a retirement plan that guarantees them definite returns. As explained the changes in market and investments affects greatly the contributions in the defined contributions, unlike in defined benefits where the retirement benefits are determined solely based on the employer’s and employee contributions. The fact that defined benefits guarantees definite amount of money, unlike the defined contributions, that is affected by capital gains and losses, makes the defined benefits plan a favourite among the employees.
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However, employers are more likely to prefer the defined contributions plans as they offer capital for investment at no risk. Moreover, since the defined contributions are calculated after factoring the effects of market conditions and capital losses on the defined contributions, it means the employers stand no risk of meeting the losses that may result from their investments on the contributions. This makes the defined contributions favorable retirement models for employers, while proving to be too risky for employees, who are not guaranteed a definite payout upon retirement.
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