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Pension Plans

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Employers have been providing their employees with a pension plan for many years. Through the use of a funding agency, payments are invested so that periodic payments can be made to the employee during retirement. Defined contribution and defined benefit are the two most common type of pension plans. However, employers offer additional retirement benefits such as tuition assistance, healthcare, life insurance, and housing subsidies (Schroeder, Clark, & Cathey, 2011, p. 470) as guided by SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other than Pensions.” Each plan caries different risk and benefits for employer and employee. A brief summary is hereby provided to aid in deciding the appropriate plan for the company.
Defined Contribution Defined contributions plans are rapidly becoming the preferred plan for most firms. The plan offers less risk to employers because employees make contribution towards retirement funds. Employees contribute a set percentage, taken from the salary, to the plan. Funds are invested into a plan such as a 401K or Thrift Savings Plan (TSP) for Federal employees. The amount the retiree receives is based on the return on investment at the receipt. That is, the benefits the recipients earn are based on the stability of the investment and the return earned on funds during the time of investment. The risk of the investment is borne by the employee as the market changes in value. The employer’s responsibility is the “annual contribution to the pension plan fund” (Schroeder, Clark, & Cathey, 2011, p. 457). For accounting purposes, disclosures should include the group covered by the plan, the existence of the plan, and factors concerning the contributions of the plan. Moreover, the company needs to disclose any information that affects “comparability from period to period (such as amendments increasing the annual

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