A defined benefit plan is a retirement plan that contains a pre-established benefit (calculated by a formula) for employees at retirement. Some formula factors can include – but are not limited to – salary and duration of employment.
Due to their inherent complexity, defined benefit plans are often more costly to maintain than others such as defined contribution plans. Retirement benefits are received through regular payments over the lifetime of the employee beginning at “normal retirement age” (established by the plan; usually 65).
More and more employers are replacing DB plans with defined contribution plans due to the lack of expenses and obligation associated with the latter. Below are the pros and cons for both employers and employees under a defined benefit plan.