Defined Benefit Vs. Defined Contribution

• The two major types of employer-sponsored pensions are defined benefit and defined contribution. Defined benefit plans are funded by the employer and promise a guaranteed amount of payout on retirement. Defined contribution plans, on the other hand, are funded by either the employer or employee, or both, and have a set amount going into the plan, but amounts received in retirement are based on the investment returns of the plan. The former puts the risk on the employer and the latter puts the risk on the employee. As of 2011, defined benefit plans are few and far between, as most employers have changed to defined contribution plans.
  
  

Rollover on Leaving an Employer

• Every retirement plan is different and has its own rules on withdrawals and rollovers. In general, defined benefit plans cannot be rolled over into a different plan, although sometimes the employee may be offered a lump-sum cash buyout. In defined contribution plans, the former employer is not required by the IRS to keep the plan open if it has less than $5,000 in it. The employer can automatically roll the amount into an individual retirement account (IRA) on behalf of the employee. If the plan contains more than $5,000, the employee can choose from several options when deciding what to do with the money.
  
  

Options for Rollover

• On leaving an employer, an employee can choose to leave the funds in the plan, usually a 401k plan, if it is in excess of $5,000. She can also set up an IRA and have the funds rolled directly into it. The plan administrator must accomplish this rollover without the employee touching the funds; otherwise they may become taxable. The employee can also choose to roll the plan into her new employer's defined contribution plan, to keep all of the funds together. The last option an employee has is to cash out the plan, although this makes the funds taxable income if they are not returned to a qualified plan within 60 days of withdrawal. If the plan owner is less than 59 1/2 years old, there is also a 10 percent penalty assessed for early withdrawal.
  
  

Benefits of Rolling Over a Pension

• Leaving pensions with former employers does not allow to retain control over investment decisions and the riskiness of the underlying investments. Rolling old pensions into an IRA means that you can make your own investment decisions and withdraw the funds when you need them and as much as you need. Having multiple pension plans also exposes you to the risk that one or more of your former employers will go bankrupt or otherwise misuse pension assets.