What is a Defined Benefit Plan?
A Defined Benefit Plan (also known as “a qualified benefit plan”) is an employer-sponsored retirement plan where the employee’s benefits are calculated utilizing a formula that takes into account factors such salary history and length of employment.
The company handles the plan’s investment risk and portfolio management. The employee has limitations regarding when and how he can withdraw any money without penalty. The term “defined” is used because the formula used to calculate the company’s contribution already is established.
Defined benefit plans differ from other pension plans where the amount the employee receives is affected by the investment return on the plan’s portfolio. In those plans, employers must use company earnings to make up any funding shortfall.