Defined Benefit Plan definition

A retirement plan that uses a formula to determine how much a person will get paid per month upon retirement, rather than the amount be based on the individual’s investment history and the financial products they’ve used. The formula may take into account earnings history, final salary, age and length of service. The risk in these pension plans generally lies with the employer who would benefit from any positive shifts in the landscape.

Disadvantages of defined benefits plan include an ‘age bias,’ which makes it more costly to fund pension plans for older employees as the value of the benefits to the individual generally accelerates the further they are along their career.

A related plan is the defined contribution benefit plan, whereby the monies contributed by the employer and the employee is known in advance, but the amount to be paid out is not.

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