What is a Defined Benefit (DB) Retirement Plan?

A Defined Benefit (DB) retirement plan is a traditional pension plan where the employer promises to pay employees a specific retirement benefit, which is usually determined by a formula considering factors such as the employee’s salary, years of service, and age at retirement. This type of plan is distinct from Defined Contribution (DC) plans, where the retirement benefit depends on the contributions made and their investment performance. In a DB plan, the employer commits to providing a set payout, ensuring that employees receive a predictable and stable income during retirement.

The formula used to calculate the retirement benefit in a DB plan typically involves multiplying a percentage of the employee’s final or average salary by the number of years they have worked for the company. For example, a plan might offer 1.5% of an employee's final average salary multiplied by the number of years of service. If an employee worked for 30 years and had a final average salary of $80,000, their annual pension benefit would be $36,000 (1.5% x 30 years x $80,000) [1].

One of the key features of a DB plan is that the employer bears the investment risk. This means that regardless of how well or poorly the plan’s investments perform, the employer is responsible for ensuring that the promised benefits are paid out. To meet this obligation, employers must make regular contributions to the pension fund and manage the investments to maintain sufficient funding levels. Additionally, many DB plans are insured by the Pension Benefit Guaranty Corporation (PBGC), a federal agency that steps in to cover benefits if the plan fails [2].

While DB plans were once the standard in retirement benefits, they have become less common in recent decades due to the financial burden they place on employers. The shift has been toward Defined Contribution plans, where the responsibility for retirement savings and investment decisions falls more heavily on employees. Nevertheless, for those who are covered by a DB plan, the guaranteed nature of the benefit provides significant financial security in retirement, offering peace of mind that is harder to come by in other types of retirement plans [3].

Overall, Defined Benefit plans provide a stable and predictable source of income in retirement, making them a highly valued benefit for employees who have access to them.

References:

 [1] U.S. Department of Labor. (n.d.). What is a Defined Benefit Plan? Retrieved from https://www.dol.gov/general/topic/retirement/typesofplans 

 [2] Pension Benefit Guaranty Corporation. (2023). Pension Insurance Data Book. Retrieved from https://www.pbgc.gov/sites/default/files/pension-insurance-data-book.pdf 

 [3] Employee Benefit Research Institute. (2020). The History and Future of Defined Benefit Plans in the United States. Retrieved from https://www.ebri.org/docs/default-source/research/briefs/ebri_2020.pdf

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