What Is a Variable Benefit Plan?
Let me explain what a variable benefit plan is—it's a retirement plan where your payout varies based on how the investments in the plan perform. You might recognize 401(k) plans as a prime example of this.
Key Takeaways
A variable benefit plan is essentially a qualified retirement account whose value goes up and down with the market performance of its investments. Think of defined-contribution plans like 401(k)s as the most common type. While these can offer higher long-term returns than fixed defined-benefit plans, they do put you, the account holder, at risk from market fluctuations.
Understanding a Variable Benefit Plan
Variable benefit plans, which you might also hear called defined-contribution plans, let you manage your own account. This is different from defined-benefit plans, where you get fixed payments in retirement based on a set formula, not on how investments do.
In these variable plans, the investment risk moves from the employer to you, the employee. If you pick poor investments, you could end up with less money, but if you choose wisely, you might get more. That's why your ability to make good investment decisions is key here.
History of Variable Benefit Plans
People have been putting money into financial markets for retirement since the start of capitalism. The first private pension plan in the U.S. came from the American Express Company in 1875.
As life expectancy increased in the late 19th and early 20th centuries, figuring out retirement for the growing middle class became a bigger issue. Congress stepped in during the 1920s by making contributions to private pensions tax-deductible, and by 1929, there were 397 such plans in the U.S. and Canada.
Pension plans really took off after World War II, with unions pushing for them through strikes. From the end of the war until around 1980, defined-benefit pensions—where you're guaranteed fixed benefits for life—were the main retirement security for American workers.
The Pressure of Maximum Returns
Those defined-benefit pensions put a lot of strain on companies, especially with foreign competition and shareholders demanding top returns. This pushed the private sector toward variable benefit plans, where the company's contribution is fixed, but your payout depends on investment performance.
Since the early 1980s, access to defined-benefit plans has dropped for workers. Data from the Bureau of Labor Statistics' 2020 National Compensation Survey shows that only 15% of private-sector workers were in defined-benefit plans, while about 65% had access to defined-contribution plans.
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