Defined Benefit Plan

Retirement

A defined benefit plan promises a specific retirement benefit (typically a monthly check for life), with the employer bearing the investment risk and funding obligation. Traditional pensions are the classic example. The employer must invest plan assets sufficiently to meet the benefit promises, regardless of market returns. Employees don't make investment decisions; they receive what the formula dictates. Defined benefit plans have largely disappeared from the private sector due to underfunding risks and accounting complexity, but remain dominant in the public sector and some unions. The opposite is a defined contribution plan (401k, IRA) where employees bear investment risk.