Defined Benefit Plan

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 a 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 plan 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).

 

(Source: Retirement Dictionary)