Defined Benefit (DB) Pension Plan

A Defined Benefit (DB) plan is a type of employer-sponsored pension plan that promises a predetermined, guaranteed retirement income to employees. The benefit is typically calculated using a formula based on the employee's earnings, years of service, and age at retirement.

Unlike Defined Contribution (DC) plans, where the retirement income depends on investment performance, a Defined Benefit plan places the investment risk and funding responsibility on the employer or plan sponsor. The employee receives a stable, predictable pension, regardless of market conditions.

Key Features of a Defined Benefit Plan

Common Pension Formula Examples

• Final Average Earnings Formula:
  Example: 2% × average of last 5 years' salary × years of credited service
• Career Average Earnings Formula:
  Example: 1.5% × average salary over entire career × years of service

Advantages for Employees‍

• Predictable, lifelong income in retirement
• Not affected by market volatility
• Encourages long-term employee retention

Considerations for Employers

• ‍‍Requires long-term financial commitment
• Subject to regulatory funding requirements and actuarial oversight
• May present funding challenges during periods of low investment returns or demographic shifts

Summary
A Defined Benefit plan offers security and predictability to employees by guaranteeing a retirement income based on a fixed formula. While increasingly rare in the private sector, these plans remain common in public sector employment and are highly valued for their reliability. The employer bears the investment and longevity risk, which makes the plan more costly and complex to manage compared to other retirement plan types.