What is a defined benefit plan?

A defined benefit plan is fundamentally characterized by its guarantee of specific monetary benefits to retirees, typically calculated based on a combination of salary history, years of service, and a predetermined formula. This ensures that participants can rely on a predictable flow of income during retirement, making it distinct from other types of retirement plans that may fluctuate based on investment performance.

In contrast, plans that vary payments based on market performance do not provide guaranteed benefits and can introduce uncertainty in retirement income. Similarly, tax-advantaged savings accounts usually allow individuals to save and invest, but they don’t guarantee a specific income payout; their value at retirement often depends on individual contributions and market conditions. Lastly, the notion of a plan requiring no employer contributions is not aligned with defined benefit plans, as these typically involve employer funding to ensure the promised benefits are available to employees upon retirement.