Key Features
- Benefits determined by
age/compensation
- Higher maximum contribution
- Good for owner/operators
or employees with negotiated
benefits
- Favors older employees
A defined benefit pension
plan is a pension plan which
guarantees that a certain
benefit will be available upon
the retirement of a participant.
This may occur in various ways.
For example, retirement benefits
of "50% of final average
compensation", "$50 per month
for each year of service" or "2%
of average compensation for each
year of participation" are
different expressions of defined
benefit plans. The important
element here is that the benefit
is determined by the age,
compensation or employment of
the employee and not by the
amount of contributions made on
his or her behalf.
The annual contributions must be determined by an actuary and will be redetermined each year to
reflect the effect of current contributions, coverage and actuarial experience. There are minimum
required contributions annually that need to be satisfied, so this type of plan is not as flexible as a 401(k)
or profit sharing plan. Maximum contributions which may be made to a defined benefit pension plan are
generally much larger than other types of plans.
Defined benefit pension plans
are generally the most expensive
type of retirement benefit
available. They exist primarily
in small companies or
professional practices where the
owner(s) are also the employees
of the business, and in large
companies which have negotiated
benefits with employee
organizations.
Defined benefit plans tend to
favor older employees over
younger employees, and are
generally inappropriate where
the group of employees intended
to be benefited is below age 40.
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