Defined-Benefit Plan

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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.
References in periodicals archive ?
Across the United States, there has been a noticeable trend toward increased coverage by defined contribution plans and a decline in the prevalence of defined benefit plans. Studies examining this trend (including Clark and McDermed 1990; Gustman and Steinmeier 1992; Ippolito 1995) attribute it to the introduction of 401(k) plans, the rising cost of administering defined benefit pension plans, and changes in the industrial distribution of the U.S.
The airline said that this is in addition to the more than USD287m American Airlines has contributed to its defined benefit plans earlier this year.
While this is not entirely surprising given the current retirement landscape--seismic shift from defined benefit plans to defined contribution plans among employers, volatile capital markets, and growing attention on Social Security solvency and potential reform--the retirement income market today remains a largely untapped opportunity and an underserved need.
Many of the remaining companies with defined benefit plans can't be relied on either, because their plans are underfunded.
To attract and retain quality labor, employers began offering defined benefit plans that provided retirement security in the form of a monthly pension benefit for life, with the employer accepting the risks of funding, market volatility and changing demographics, namely, longer life spans.
Thompson, 1999, The Survival Rate of Defined Benefit Plans, 1987-1995, Industrial Relations, 39: 228-245.
During the 1990s, traditional employer-funded defined benefit plans (often called "pension plans") had fallen out of favor, due to high expenses, high administrative costs and the rise in popularity of defined contribution plans such as 401(k)s.
In recent years, classification and measurement of pensions have been complicated by the growth of pension arrangements that combine aspects of both types of plans--particularly defined benefit plans with a specified cash settlement option in lieu of regular retirement payments, such as in a cash balance plan.
132 (revised 2003), Employers' Disclosures about Pensions and Other Postretirement Benefits, that improves financial statement disclosures for defined benefit plans. The change replaces existing FASB disclosure requirements for pensions.
(PBGC), the federal agency that takes over busted defined benefit plans, estimates that private plans are underfunded by $400 billion.
This eliminates actuarial expenses to calculate yearly contributions; such expense is a major disadvantage of defined benefit plans.
Many defined benefit plans, frequently offered to government or large corporation employees, are also active in socially responsible investing.