A defined benefit plan is a retirement plan in which a retired employee’s benefits are determined by the employer based on a set formula that uses factors such as age, salary, and tenure with the company to calculate payment. The benefits of this plan are predictable because the terms and conditions are determined in advance; hence the term “defined benefit.” 

This type of retirement plan is usually under the control of the employer and includes restrictions and penalties for early withdrawals. However, contributions can be made by the employee, the employer, or both.  

Unlike some pension funds, the benefits of a defined benefit plan are not dependent on the return on invested funds or assets. The employer must still pay benefits to retirees whether or not investments toward the retirement plan fail or succeed. In some cases, companies end up with a deficit as they are forced to use some of their earnings in order to meet their pension obligations.

The benefits received from most defined benefit plans are guaranteed by federal insurance. The Pension Benefit Guarantee Corporation (PBGC) is a federal corporation that oversees and protects the pensions of more than 44 million workers and retirees. The PBGC was created by the Employee Retirement Income Security Act of 1974.

Defined benefit plans are administratively complex and very costly for employers to maintain. In recent years, they have been on a decline as many pension plans opt for 401(k)s and other contribution plans.

You can learn more about defined benefit plans and other retirement plans, benefits, and savings by visiting the U.S. Department of Labor’s Web site: www.dol.gov/dol/topic/retirement/typesofplans.htm