Defined Benefit Plan (Pension)
A defined benefit plan promises a specified monthly benefit at retirement, typically based on salary and years of service, with the employer bearing all investment risk.
Exam Tip
Defined Benefit = employer bears risk, benefit is defined. Max annual benefit: $280,000 (2025).
What is a Defined Benefit Plan?
A defined benefit plan (pension) promises to pay a specific benefit amount at retirement based on a formula.
Typical Formula
Years of Service Ć Benefit Multiplier Ć Final Average Salary
2025 Limits
| Limit Type | Amount |
|---|---|
| Maximum Annual Benefit | $280,000 |
| Compensation Limit | $350,000 |
Who Bears Risk?
| Risk Type | Defined Benefit | Defined Contribution |
|---|---|---|
| Investment Risk | Employer | Employee |
| Longevity Risk | Employer | Employee |
Study This Term In
Related Terms
Defined Contribution Plan
A defined contribution plan is a retirement plan where contributions are made to individual accounts, with the final benefit depending on contributions and investment performance.
401(k)
A 401(k) is an employer-sponsored retirement savings plan that allows employees to contribute pre-tax dollars, with potential employer matching, and tax-deferred growth until withdrawal.
Vesting
Vesting is the process by which an employee earns full ownership rights to employer-contributed retirement benefits over time, with employee contributions always being 100% vested immediately.
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