ABA Family Legal Guide

Law and the Workplace

Leaving a Job

Pension Plans

How does a worker accrue benefits under a pension plan?

Benefit accrual is the process of building up benefits once an employee qualifies for the pension plan. Normally, employees start accumulating benefits as soon as they begin participating in the plan. How benefits accrue depends on the type of pension plan.

A defined contribution plan establishes a separate retirement account for each participant. The employer (and sometimes the employee) makes a contribution to the account. The benefit due to the worker upon retirement depends on the amount of money in the account, the investment returns on contributions, and the payout method selected. Benefits accrue based on a predetermined amount that the employer at least annually pays into the account.

A defined benefit plan promises a worker a specific level of benefit payment upon retirement. The benefit is financed by the employer's contributions and investment gains on those contributions. Benefits are paid to the worker based on total years of participation in the plan and usually his or her final salary or his or her average salary for the last several years of his or her employment.

One significant difference between a defined contribution plan and a defined benefit plan is that in a defined contribution plan the ultimate return depends on the investment return on the contributions, while in a defined benefit plan the level of benefits is predetermined and the employer must make additional contributions if there is a poor return on the plan's investments.