Defined Benefit Plan
A Defined Benefit Plan is a type of employer-sponsored retirement plan in which an employee’s retirement benefits are calculated based on a predetermined formula. This formula typically considers factors such as the employee’s salary history, duration of employment, and a set benefit accrual rate.
In a Defined Benefit Plan, the employer is responsible for funding the plan and managing the investment risks, ensuring that there are sufficient assets to pay the promised benefits to retirees. Employees usually receive a monthly benefit upon retirement for the rest of their lives, providing a predictable income stream. For example, a typical formula might provide retirees with a benefit equal to 1.5% of their average salary over their final three years of employment, multiplied by the number of years they worked for the company.
« Back to Glossary Index