What Is a Variable Benefit Plan?
A variable-benefit plan is a retirement plan in which the payout changes depending on how well the plan’s investments perform. 401(k) plans are one example of a variable benefit.
Understanding a Variable Benefit Plan
Plan holders with variable-benefit plans and defined-contribution plans can oversee their accounts. A defined-benefit plan, on the other hand, bases its retirement benefits on eligibility criteria rather than investment results and offers the plan participant fixed, predefined amounts upon retirement.
Plans with variable benefits transfer the employee’s investment risk to the company. If an employee makes better investing decisions, he can get less money from a variable-benefit plan. But he can also choose better investments and reap greater rewards. Thus, the employee’s capacity for wise investment selection is essential in variable-benefit programs.
Variable Benefit Plans’ Past
For as long as capitalism has existed, people have invested in financial markets to fund their retirement. The first private pension plan in the US was created in 1875 when the American Express Company began providing a pension plan to its workers.
In the late 19th and early 20th centuries, Americans’ life expectancies increased, making it more and more challenging to meet the retirement needs of the middle class. In the 1920s, Congress made tax-deductible payments to private pensions to promote the expansion of these accounts. In the US and Canada, there were 397 private-sector programs in place by 1929.
After World War II, when unions started widespread strikes to demand pensions, the number of pension schemes skyrocketed. Defined-benefit pensions, or pensions in which an employee is assured a specified set of payments until death, were a significant source of retirement security for American workers from the conclusion of World War II until around 1980.
The Maximum Returns Pressure
However, these pension plans placed a lot of pressure on American businesses, which were up against more aggressive international competitors and shareholders who wanted maximum profits. As a result, the private sector started to rely more on variable-benefit plans, where the performance of the pension investments and the company’s specified contribution determine the actual payment.
Employee access to defined-benefit plans has decreased since the early 1980s. According to the Bureau of Labor Statistics’ 2020 National Compensation Survey, a mere 15% of workers in the private sector were enrolled in defined-benefit plans. In contrast, around 65% of employees in the private sector had access to a defined contribution plan.
Conclusion
- A qualifying plan that varies in value based on the market value of its assets, such as a retirement account, is known as a variable benefit plan.
- Variable benefit schemes, such as 401(k)s, are often defined-contribution plans.
- Variable-benefit plans expose account holders to market risk even if they have the potential to provide higher long-term returns than fixed-defined-benefit plans.
