Percentage-of-Contribution FormulaAdopted primarily by multiemployer plans, the percentage-of-contribution formula is the least common method used in the private sector and has never been employed for government plans. In 2002, only 4 percent of private-sector employees covered by defined plans had their benefit calculated using that type of formula. Plans that use this formula operate in some ways like defined-contribution plans. Employers (and occasionally employees) make contributions, and plan administrators track them separately for each participant. At retirement, the participant is promised a monthly benefit equal to a fixed percentage of the total contributions. For example, if the promised percentage was 1 percent and a participant had accumulated $50,000 in contributions, the monthly benefit would be $500. The key to the viability of the percentage-of-contribution structure is that earnings from investing the contributions are attributed neither to individual participants nor to specific employers. Instead, the funds go to pay the benefits of retirees who exhaust their contributions. Thus, when employees switch from one participating employer to another, their accumulated contributions remain in the plan and their move affects neither the ultimate level of their benefits nor the potential cost of those benefits for the new employer.
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