Defined Benefit Plans

Written by Jacey Harmon
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Defined benefit plans are pension funds operated and funded by employers. Defined benefit plans are the only qualified retirement plan to offer a lifetime of guaranteed income for retirees. Large corporations such as General Motors and Chevron utilize defined benefit plans for their employees.

Employer Perspective of Defined Benefit Plans

Employers are required to make contributions to defined benefit plans once a plan is adopted. Employers are also required to create a specific formula that determines what each employee's benefit is at retirement. The employer does have command as to what goes into the formula. Length of service, annual salary, and whether to incorporate social security are all aspects an employer can consider when determining benefits. An experienced defined benefit plan provider can help with determining the benefit formula.

Employers must also define aspects of the plan that do not pertain to just the benefit formula. Employers must determine what options to give retirees at retirement. An employer may offer a guaranteed monthly income or simply a "cash out" option at retirement. Employers can also choose to allow employee contributions to defined benefit plans and what type of death and disability provisions to provide.

Defined benefit plans offer an attractive benefit for employees. As noted above some employers may not require employee contributions to defined benefit plans. The only requirement of the employee is to "put in his time" in order to become vested into the plan. The guaranteed monthly income for life is an attractive aspect to defined benefit plans for employees. Defined benefit plans are also guaranteed by the Pension Benefit Guaranty Corp (PBGC).


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