definedbenefit

A defined benefit plan is a type of retirement plan that promises a specified benefit to participants at retirement. The amount is usually calculated according to a formula rather than tied directly to contributions or investment performance.

Common formulas compute benefits from years of service and earnings, often using final or average earnings. For example, a plan might pay 1.5 percent of an employee’s final average salary for each year of service, multiplied by the number of years worked. The result is a predictable stream of retirement income rather than a function of investment returns.

Funding and risk are central features. The sponsor—typically an employer or a public entity—is responsible for funding the plan and for investment risk. Plan assets are held in a trust and must be managed to meet actuarial assumptions about longevity and demographics. If investments underperform or the employee cohort changes, the sponsor bears the shortfall and may need to increase contributions.

Payouts are usually structured as lifetime payments, with options for survivor benefits to a spouse or beneficiary. Early retirement can be allowed but may involve reduced benefits, and some plans provide cost-of-living adjustments to help maintain purchasing power.

Regulation and oversight vary by country, but defined benefit plans are generally subject to actuarial funding requirements and fiduciary standards. In the United States, ERISA governs private-sector plans, aiming to protect beneficiaries and ensure solvency through regular valuations and funding obligations.

Compared with defined contribution plans, defined benefit plans offer more predictable income but transfer investment risk to the employer and require ongoing long-term funding, which can affect sponsor stability during economic fluctuations.