Defined-Benefit Plan

A defined-benefit plan is a type of retirement plan in which the employer promises to pay a certain amount of money to the employee upon retirement. The amount of money that the employee receives is based on a formula that takes into account factors such as the employee's salary, years of service, and age.

Defined-benefit plans are often offered by large employers, and they are typically more expensive to maintain than defined-contribution plans. However, they can provide retirees with a more secure retirement income.

There are two main types of defined-benefit plans:

• Traditional defined-benefit plans: These plans are funded entirely by the employer. The employer makes contributions to the plan on behalf of the employee, and the money is invested in a variety of assets. The employee does not have any control over the investments in the plan.
• Cash balance plans: These plans are a hybrid of defined-benefit and defined-contribution plans. The employer makes contributions to the plan on behalf of the employee, but the employee also has the option to make additional contributions. The employee's account balance is credited with a guaranteed interest rate, and the employee can also choose to invest their account balance in a variety of investment options.

Defined-benefit plans offer a number of advantages over defined-contribution plans. These advantages include:

• Guaranteed retirement income: The employee is guaranteed to receive a certain amount of money upon retirement, regardless of how the investment returns perform.
• Lower risk: The employer bears the investment risk, so the employee does not have to worry about losing their retirement savings.
• Tax advantages: Defined-benefit plans offer a number of tax advantages, such as the ability to defer taxes on contributions until retirement.

However, defined-benefit plans also have some disadvantages. These disadvantages include:

• Higher cost: Defined-benefit plans are more expensive to maintain than defined-contribution plans.
• Less flexibility: The employee does not have as much control over the investments in the plan as they would in a defined-contribution plan.
• Greater risk of plan termination: If the employer terminates the plan, the employee may lose their retirement savings.

Overall, defined-benefit plans can be a good option for employees who are looking for a secure retirement income. However, it is important to weigh the advantages and disadvantages of these plans before making a decision.