Defined Benefit Plan
Defined Benefit (DB/pension) plans provide income to employees in retirement and guarantee that participant will receive their retirement benefits.
Here are some benefits of a DB plan:
Retirement plan Provides income to employees at retirement.
Employer contribution Employer contributes to the plan and assumes the risk of investment.
Listed below are some key characteristics of a DB plan:
Employer defines the benefits (formula) to provide income to employees at retirement. Employer makes contribution as defined each year to ensure the plan will be able to support payment of retiree benefits. Actuaries determine what amount the employer needs to contribute to meet this objective. Employees usually do not contribute toward the benefit. Employer assumes investment risk and the liability for providing the benefit. The benefit is predictable for the employee (based on a set formula) and is usually paid for his or her lifetime. The employee often has the option to have some percentage of the benefit continue to a survivor after the employees death for the survivors lifetime.
Employees usually have to work for an employer for a certain period of years to earn the right to a pension benefit. For example, an employee must work for an employer for up to five years before he or she will be eligible to receive a pension benefit. The time frame over which employee gains the ownership of the benefit is called a vesting schedule.
Employees collect the benefit (usually each month) once they meet early, normal or late retirement rules. Retirement age is determined by the U.S. government and applies to an age at which people typically retire. Many companies consider age 55 early retirement age and age 62 normal retirement age. Any age after normal retirement age is considered late retirement.