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Defined Benefit Plans


A Defined Benefit Plan, often called a pension plan, is an employer-sponsored retirement plan where employee benefits are computed using a fixed formula. This formula usually factors the employee's final average salary, years of service, and a certain percentage rate.
 

Defined Benefit Plans

In a Defined Benefit Plan, the employer must ensure enough funding to pay the benefits people are due to receive in retirement.

The employer's contribution amount may vary yearly, but an actuarial calculation typically determines it. The payout from a Defined Benefit Plan is generally is a fixed amount the employee receives monthly upon retirement. This amount doesn't fluctuate based on the performance of investments, making the Defined Benefit Plan less risky for employees than other retirement plans, like the Defined Contribution Plan (e.g., 401(k) plan), where the payout can vary based on investment returns.

In the United States, Defined Benefit Plans are guaranteed by the Pension Benefit Guaranty Corporation (PBGC), a federal agency, up to certain limits.

It's important to note that Defined Benefit Plans have become less common in recent years as many employers have shifted to Defined Contribution Plans, largely due to the high costs and financial risks associated with funding Defined Benefit Plans.
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