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Defined Benefit Plan

A defined benefit plan is an employer sponsored retirement plan where your employee benefits are decided based on a formula using factors such as salary history and duration of employment.

There are also restrictions on when and how you can withdraw these funds without penalties. It is also known as qualified benefit plan and a non-qualified benefit plan.

This fund is different from many pension funds where payouts are somewhat dependent on the return of the invested funds. In this plan, if there is a funding shortfall the employer has to dip into the company’s earnings to make the difference, and investment risk and portfolio management are entirely under the control of the company.

The payouts made to retiring employees participating in the defined benefit plan are determined by more personalized factors, like length of employment.

Pros and Cons:

• You – Significant benefits are possible in a relatively short period of time
• You & Employer – Employers can contribute (and deduct) more than under other retirement plans
• You – Plan provides a predictable benefit to you
• Employer – Plan can be used to promote certain business strategies by offering subsidized early retirement benefits
• You & Employer – Most costly type of plan
• Employer – Most administratively complex plan
• You – An excise tax applies if the minimum contribution requirement is not satisfied