A defined benefit plan is a type of retirement plan in which an employer promises to pay a specified benefit to employees upon retirement.
A defined benefit plan is a type of retirement plan in which an employer promises to pay a specified benefit to employees upon retirement. The benefit is usually based on a formula that takes into account an employee's salary, years of service, and age at retirement.
In a defined benefit plan, the employer is responsible for making all contributions to the plan and for ensuring that there are sufficient funds to pay the promised benefits to retirees. The employer is also responsible for managing the investments in the plan to generate the necessary returns to fund the benefits.
Employees who participate in a defined benefit plan do not have control over the investments in the plan, but they are guaranteed a specific amount of retirement income for life. The amount of the benefit is typically based on a percentage of the employee's salary at retirement, multiplied by the number of years of service with the employer.
Defined benefit plans were once more common, particularly in the public sector, but have become less prevalent in recent years due to the cost and complexity of managing them. Many employers now offer defined contribution plans, such as 401(k) plans, which allow employees to control their own investments and contributions.
Defined benefit plans can offer several benefits for employers and employees in human resource management. Here are some of the benefits: