Defined Benefit Plan

A pension promising a specific benefit; the employer bears the investment risk.

Retirement Plans, Accounts & Trading Series 65 · Section 3

What is Defined Benefit Plan?

Benefits follow a formula - typically salary and years of service - and an actuary sets the required employer contributions. Poor investment results mean the employer must contribute more. Private plans are insured by the PBGC. Can favor older, highly paid employees, since large contributions can be made for short remaining careers.

Defined Benefit Plan: a worked example

A plan paying 1.5% of final average salary per year of service: 30 years at $100,000 = $45,000 a year.

What is the difference between Defined Benefit Plan and Defined Contribution Plan?

Defined benefit = the payout is promised, employer bears risk. Defined contribution = only the contribution is defined, employee bears risk.

Often confused with Defined Contribution Plan - see Defined Benefit Plan vs Defined Contribution Plan side by side.

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More terms in Retirement Plans, Accounts & Trading

IRA Rollovers vs. Transfers 60-day rollovers are limited to one a year; direct transfers are unlimited. 10% Early Withdrawal Penalty & Exceptions Distributions before 59 1/2 cost 10% extra, unless an exception applies. Solo 401(k) A 401(k) for a self-employed owner with no employees other than a spouse. Defined Contribution Plan An individual account plan whose payout depends on contributions and returns. 403(b) Plan A salary-deferral plan for public schools and 501(c)(3) nonprofits. 457 Plan Deferred compensation for state and local government employees. SIMPLE IRA A low-cost plan for employers with 100 or fewer employees. SEP IRA An employer-funded IRA plan, up to 25% of compensation.

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