What characterizes a defined benefit plan?

A defined benefit plan is characterized by its promise to provide participants with a specific benefit amount at retirement, which is predetermined and typically based on a formula that takes into account factors such as salary history and years of service. This structure is fundamentally different from defined contribution plans, where retirement benefits depend on the investment performance of individual contributions.

The guarantee of a specific payment amount is a key feature of defined benefit plans, providing employees with a level of security regarding their pension payments upon retirement. This assurance contrasts with plans that rely solely on the accumulation of contributions without a fixed outcome, which poses greater variability in benefits received at retirement.

Other attributes associated with defined benefit plans may include employer funding responsibilities and the requirement for the plan to be actuarially sound, which further distinguishes it from options tailored for self-employed individuals or plans that rely on individual contributions without a guaranteed payout.