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February 19, 2009

Defined benefit plan (Defined benefit pension plan )

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An employer sponsored qualified-plan, where employee benefits are intended to be  predetermined and guaranteed. Typically, a participant is promised a monthly benefit upon retirement. This amount may be a stated amount, such as $200 per month , or based on a formula that takes into consideration salary and years-of-service. An example of a benefit-formula is an 1-percent of average compensation ( averaged over the last three years-of-employment) on a monthly basis.

Plan sponsors are required to make up for any deficiencies caused by poor market performance, so as to ensure participants receive their promised benefits

A defined benefit plans uses actuarial assumptions to fund the plan, based on the promised benefits to participants.

Benefits in defined benefit plans are  usually protected  up to certain amounts, by federal insurance provided through the Pension Benefit Guaranty Corporation (PBGC).

Referring Cite

IRC § 414(j), ERISA §3(35);

Additional Helpful Information

  • Defined benefit plans are ideally suited for employers that want to fund the plan with higher contribution amounts  than that which is permitted under a defined contribution plan, and does not mind the high associated expenses .
  • Defined benefit plans are the most expensive to maintain of all the employer sponsored plans, but is the most effective in attracting high-quality employees in cases where the type of retirement plan is a tiebreaker for the potential employee.

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