Defined-Benefit Plan: An Overview

A defined-benefit plan is an employer-sponsored benefit for retired employees, with a lump-sum payment or a series of payments awarded after retirement based on the employee's salary and length of service, among other factors.

A defined-benefit plan is essentially a pension plan. The main alternative for U.S. workers is a defined-contribution plan like a 401(k) plan, which allows participants to manage their retirement savings but does not guarantee🦂 a specific income.

Understanding Defined-Benefit Plans

Also known as 澳洲幸运5官方开奖结果体彩网:pension plans or qualified-benefit plans, this type of plan is called "defined benefit" because&nbs✤p;the amount of the payme𒉰nts is pre-set based on a formula that takes into account the individual's past salary, number of years worked, and other factors.

The em𓆏ployer manages the money but is responsible for paying the pensions owed, regardless of the performance of the investments in the account.

In a defined contribu♛tion plan, the amount of money available to the retiree depends on the amount in the account. As with most investments, the account balance can grow or shrink as the markets move.

Other Differences

The money in a defined benefit plan is off-limits until the em♒ployee retires. No withdrawals or loans are allowed, as with a 401(k) plan.

The company retains control of the money and pays it out according to established rules, as a lump sum or a series of payments. By contrast, employees who retire take their 401(k) accounts with them. They decide when to take withdrawals and how much.

Contributions to Defined-Benefit Plans

The employer usually funds the plan by contributing a regular amount, usually a percentage of the employee's pay, into a 澳洲幸运5官方开奖结果体彩网:tax-deferred account. This is effectively deferr🀅ed com🐻pensation.

Depending on how the plan is written, employees may be able to make additional contributions to increase the eventual♛ p🅠ayout.

The plan may pay monthly payments throughout the employee’s lifetime or make a single lump-sum payment.

For example, a plan for a retiree with 30 years of service at retirement may state the benefit as an exact dollar amount, such as $150 per month per year of the employee's service. This plan would pay the employee $4,500 per month in retirement for life. If the employee dies, some plans distribute benefits to the employee's beneficiaries.

The Bottom Line

If you understand how a defined-benefit plan works, you can plan your retire🐻ment more strategically.

For exam𝔍ple, you might choose to work a year or two longer, since length of service and final salary are factors in determining your payout.