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Defined Benefit Plan: Why It’s A Great Source of Economic Security for Retirees

Defined Benefit Plan: Why It’s A Great Source of Economic Security for Retirees

For many employees, the rapid phasing out of defined benefit plans in the corporate world is bad news. Since most seniors need an income source outside of Social Security to pay their bills in retirement, defined benefit plans were created to help them retire comfortably. 

A defined benefit plan is an employer plan also known as a pension plan. A certain amount of money is guaranteed to workers in retirement and the benefits are usually calculated based on length of service or employment history, and salary. Defined benefit plans may no longer be as popular as they once were but they remain to be a source of economic security for millions of Americans. 

Breaking Down Defined Benefit Plans

Defined benefit plan starts with the employer promising a certain payout in retirement for its employees. A preset (or defined) formula that accounts for factors including length of service, age, and earnings history, is used to calculate the payout 

There are for-profit companies that are known to offer defined benefit plans but they are usually offered by the government and public agencies as well. In general, the fund used for defined benefit plans exclusively comes from the employer’s contributions however there are cases where employees put in a portion of their earnings.

It is the employer’s responsibility to administer the defined benefit plan being offered, cover all of the costs involved, make investment decisions, and manage investments for the plan. Any related risk is also assumed by the employer. This means the employee no longer have to worry about the plan since the employer will take care of everything.

Strict rules are usually imposed with regards to withdrawals. The employees must follow the rules in order to avoid penalties. Typically, plan benefits can only be withdrawn by the employee once they reach a certain age or fulfill certain criteria.

Plans work in different ways. There are some plans that distribute benefits to employees as monthly payments, while others provide a single lump sum payment upon retirement. Certain plants also distribute benefits to the beneficiaries of employees who are no longer alive.

Defined benefit plans versus defined contribution plans: What’s the difference?

Employers, employees or both make regular contributions in a defined contribution plan. It’s a type of retirement plan where future employee benefits are based on the dollar amount of contributions made and their eventual value based on the growth of the investment. This kind of plans do not guarantee a specific benefit to be paid in the future which makes it different from defined benefit plans.

Employers becomes responsible for assuring that there’s enough money to pay employee benefits as scheduled when it comes to the defined benefit plan. Whatever risks there is involved in the plan will be assumed by the employers.

A plan where employees contribute a portion of their earnings and invest their money for it to grow over time is called 401(k) and is the most common type of defined contribution plan. The burden of funding 401(k) typically falls at the individual employee level although employers will offer to match a portion of employee contributions in many cases.

If you’re an employer, you probably should need to evaluate whether to offer defined benefit plans because the risk isn’t the only problem you’re going to face, the expensive costs needed to maintain it as well. Employees who participate are the ones who will share the association administration fees with defined contribution plans. 


Records show that 60% of Fortune 500 companies offered defined benefit plans to new employees but the number fell to just 24% by the end of 2013. The reasons mentioned above are what made defined benefit plans become less popular among companies. It’s a sad news for a lot of employees. The absence of defined benefit plans left more and more people in the workforce into an unsecured financial status with regards to retirement.

If your employer offers both defined benefit plans and defined contribution plans, you should definitely participate in both. This is because the amount of your defined benefit plan typically won’t be enough for you to live comfortably in retirement. After all, your decisions today will affect how you will be living in the future so decide wisely.

Unifirst Financial & Tax Consultant
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