What Is a Defined Benefit Plan?

What Is a Defined Benefit Plan?

By Charles Joseph | Editor, Financial Affairs
Reviewed by Corey Michael | Senior Financial Analyst

A Defined Benefit Plan is a type of employer-sponsored retirement plan. Traditionally, it’s used by government and union workers, although some large companies offer it as well. With a Defined Benefit Plan, upon retirement, the employee will receive a fixed payout, commonly referred to as the “pension”. This payout is based on several factors such as salary, length of employment, and a predetermined formula set by the company. Unlike Defined Contribution Plans, such as 401(K)s, the investment risk and portfolio management are handled by the employer not the employee.

Related Questions

1. Is a Defined Benefit Plan the same as a pension?

Yes, the terms “Defined Benefit Plan” and “pension” are often used interchangeably. Both offer a fixed income to retirees based on factors like length of service and final salary.

2. Can I lose my Defined Benefit Plan?

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It’s uncommon, but not impossible. If the company were to go bankrupt and couldn’t meet its pension obligations, there could be losses. However, many Defined Benefit Plans are federally insured which offers some degree of protection.

3. How is the payment amount calculated?

The payment is usually calculated using a formula that factors in your salary, years of service, and a benefit multiplier. This varies from plan to plan.

4. Can I contribute to my Defined Benefit Plan?

No, contributions to a Defined Benefit Plan are typically made by the employer only. Employees do not have the option to contribute additional funds.

5. What happens to my Defined Benefit Plan if I change jobs?

If you change jobs, options include leaving the money in the plan until retirement, withdrawing the funds, or in some cases, transferring the funds into another retirement plan. The specific rules differ among plans, and there can be tax implications, so it’s wise to consult with a financial advisor.