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Retirement fund is invested in long-term assets with a commitment to bring about income damaged location. Businesses or organizations - such as a corporation, trade union, council or state agency - usually the unit making this commitment clearly stating the specific pension plan. These units are referred to as the sponsor pension plans.

The pension plan is divided into two major categories, based on the nature of the commitment. We can plan a defined benefit (DB) or contribution plan identified (DC). A defined benefit plan is a pension plan clearly states the obligations of the plan sponsor benefits for plan participants. In contrast, a defined contribution plan clearly states the obligations of the donor in favor of the contribution to the pension fund rather than benefits to plan participants. There are also plans in the form of hybrid between the two, such as cash balance plans which have the characteristics of both DB and DC plans. A cash balance plan is a defined benefit plan that benefits are clearly presented in the escrow account profile. These accounts indicate the current value of the accumulated benefit of the participants and to create favorable conditions for the creation of a new investment plan in a flexible manner.

Understanding the difference between DB and DC features are very useful. A sponsor DB plans promise employees or members of an organization that benefits income damage location based on defined criteria. For example, an employee may be committed for each year of employment with the company, he or she will receive a fixed interest in cash every month. Or, a plan sponsor can commit to pay a fixed rate on a number of factors related to the wages of workers (for example, last year, an average of the last five years, the average first five years of the past ten years). Donors can also committed to change the rate of pay for those who retired in order to reduce the impact of inflation. In addition, this plan can also include a list of contingency plans in case of early retirement benefits for surviving spouse and other cases.

All DB plans have a common characteristic: they are committed by donors for payment in future financial benefit or "pension liability." The nature and behavior of this paragraph shall be uncertain and often complex; therefore, the set of investment rules for DB plans to meet specific challenges.

Commitment of donors to the DB plan was created specifically for the retirement phase - is the amount that the employee has the ability to draw. In contrast, the commitment of the DC plan is created for the current period - is the provision that the sponsor will contribute on behalf of the workers. Basic contribution commitment can be a fixed rate payment included in the plan by the employer. Or, is committed to contribute to reach a fixed rate that participants want to contribute to the plan.

DC plans include the following components (1) retirement plan in which contributions are committed and does not include commitment to the benefits, and (2) profit sharing plan in which the contributions or at least part of the contribution is based on the profit contribution of the donor. We can classify the DC plan as personal objects including small, small business, and the tax savings benefit plans of government in which the benefits are not committed and participants often contribute to the plan (e.g., IRAs - Individual Retirement Account). The basic elements of the plan include (1) contributions to account for the individuals involved, (2) the capital investment in a period of time, (3) investments from tax-deferred plan, and (4) to the time of withdrawal from the plan or reach retirement age, the participants who received the money from the account can be a sum or a series of payments mathematics.

The important difference between DC and DB plans are as follows:

• For DC plans, because the benefits are not committed, plan sponsors do not bear the financial burden, in contrast to DB plans.

• DB plan is terminated by the plan sponsor. The participants in DC plans bear the investment risk (e.g. the ability to investment results is not high). In contrast, in the DB implementation plan sponsors must take this risk (at least partly) because donors have a responsibility to pay a sum of future retirement benefits determined.

• Because the DC plan contributions are made based on personal interest, the payment of contributions and investment earnings generated belong to the DC plan participants. Empowerment plan, and the ability of the tax or penalty payments, a member can transfer the assets in your plan to a new plan.

On investment stance, DC plans are divided into two categories:

• Directed by donors, of which almost like a DB plan, donors choose investments. For example, a profit sharing plan (retirement plan where contributions are made only by the employer) as directed by the donor.

• Directed by participants, in which donors provide a list of diversified investment options and the participants decide their own investment mechanism. Most DC plans as directed by the participants.

For a DC plan is directed by participants, donors have very little influence on the creation of investment allocation policy. Even for DC plan directed by donors, investment policies much less complex than in the DB plan.