Benefits Administration and Retirement Plans
2
Plan Types
Defined benefit vs defined contribution
401k
Most Common
Defined contribution plan
2
Vesting Types
Cliff vs graded
Defined Benefit vs Defined Contribution
In defined benefit, the EMPLOYER bears investment risk. In defined contribution, the EMPLOYEE bears it.
Defined Benefit
- Employer promises specific payout
- Employer bears ALL investment risk
- Pension formula based on salary and years
- Becoming increasingly rare
- Employer must fund shortfalls
Defined Contribution
- Employer contributes to employee account
- Employee bears ALL investment risk
- 401(k) is the most common type
- Payout depends on market performance
- Portable when employee leaves
Vesting Schedules
your own contributions are always 100% vestedCliff Vesting
0% ownership until a set date, then 100% all at once. Example: after 3 years of service, the employee owns the full employer match. Before that date, they forfeit it all if they leave.
Graded Vesting
Ownership increases gradually over time. Example: 20% per year for five years. After year two, the employee owns 40% of employer contributions. Provides incremental retention incentive.
Health Plan Types
HMO
Requires a primary care physician and referrals. Lowest cost, most restricted network.
PPO
No referrals needed. Can see out-of-network providers at higher cost. Most flexibility.
EPO
No referrals needed but must stay in-network. Hybrid between HMO and PPO.
HDHP + HSA
High deductible with tax-advantaged savings account. HSA funds roll over year to year.
want to test yourself on this?
Practice questions on retirement plans, vesting, and health benefits with instant feedback
Practice NowExam Traps
Defined Benefit = Employer Risk
In a defined benefit plan, the employer promises a specific retirement payout and bears all investment risk. If the market crashes, the employer still owes the pension. In defined contribution, the employee bears the risk because their retirement depends on market performance.
Employee Contributions Are Always 100% Vested
Money the employee contributes to their own account is always fully theirs immediately. Vesting schedules only apply to employer contributions. The exam will try to trick you into thinking employee money can be forfeited.
Cliff = All or Nothing, Graded = Gradual
Cliff vesting means 0% until a specific date, then 100% all at once. Graded vesting means ownership increases incrementally over time (e.g., 20% per year for five years). Know both patterns cold.
Who Bears the Risk?
Defined benefit = employer bears it (pension promise). Defined contribution = employee bears it (market decides).
Your Money Is Yours
Employee contributions are always 100% vested immediately. Vesting schedules only apply to employer match.
Your employer says "work here 30 years and I will pay you $3,000 per month for life after you retire." The employer must figure out how to fund that promise. If investments perform badly, the employer covers the shortfall.
Your employer says "I will put money into your personal piggy bank every month." How much is inside when you retire depends on market performance. If the market drops, your retirement shrinks. The employer's only obligation is the contribution.
Think of vesting like a loyalty reward. Cliff vesting is "stay five years and you get the full bonus." Graded vesting is "every year you stay, you earn 20% more of the bonus." Either way, your own contributions are always yours.
Ready to test your SHRM-CP knowledge?
1,200+ practice questions written by certified professionals.
Start Practicing SHRM-CP