Defined Benefit Plan
Instead of accumulating contributions and earnings in an individual account like defined contribution plans (profit sharing, 401(k), money purchase), a defined benefit plan promises the employee a specific monthly benefit payable at the retirement age specified in the plan. Defined benefit plans are usually funded entirely by the employer. The employer is responsible for contributing enough funds to the plan to pay the promised benefits regardless of company earnings.
Employers who want to shelter more than the annual defined contribution limit (PDF) may want to consider a defined benefit plan since contributions can be substantially higher resulting in fast accumulation of retirement funds.
An actuary determines yearly employer contributions based on each employee’s projected retirement benefit (which may be integrated with Social Security benefits), assumptions about investment performance, years until retirement, employee turnover and life expectancy at retirement. Employer contributions to fund the promised benefits are mandatory. Investment gains and losses decrease or increase the employer contributions.
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