Defined-Benefit Plan

Defined-Benefit Plan

A retirement plan in which the retiree receives a set amount in benefits each month once he/she begins receiving benefits. That is, the benefits the retiree receives are not dependent on the performance of the portfolio in which the contributions are invested; the company sponsoring the plan assumes the entire liability. The amount of the benefit is determined according to some formula that usually accounts for the amount of contributions and the length of time the retiree worked for the company. The disadvantage to a defined-benefit plan, from the company's perspective, is the possibility that the investment portfolio will not perform as expected, forcing the company to make payments from its earnings, or, worse, to borrow money. See also: Defined-contribution plan.

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Defined-Benefit Plan

What Does Defined-Benefit Plan Mean?

An employer-sponsored retirement plan in which employee benefits are sorted out on the basis of a formula, using factors such as salary history and duration of employment. Investment risk and portfolio management are entirely under the control of the company. There are also restrictions on when and how an employee can withdraw funds without incurring penalties. Also known as a qualified benefit plan or nonqualified benefit plan.

Investopedia explains Defined-Benefit Plan

This type of fund is different from many pension funds in which payouts are somewhat dependent on the return of the invested funds. Therefore, employers sometimes need to dip into the company's earnings when the fund's investment returns result in a funding shortfall. The payouts made to retiring employees participating in defined-benefit plans are determined by factors such as age and length of employment. A tax-qualified benefit plan has the same characteristics as a defined-benefit plan but can provide the beneficiary of the plan with added tax incentives, which are not afforded under nonqualified plans.

Related Terms:
• Defined-Contribution Plan
• Inflation
• Mutual Fund
• Net Worth
• Tax Deferred