Defined Benefits

Defined Benefit Pension Plans

A defined benefit pension plan is a pension plan that guarantees employees a specific monthly benefit at retirement. It does not define the cost to the plan sponsor. The cost of the plan is determined by the amount employees contribute and the amount the investments earn. Any shortfall in the plan must be funded by the plan sponsor. The pension definition varies between employer plans

Advantages of a Defined Benefit Pension Plan:

• Benefit is known and guaranteed
• Time to invest is not as crucial a factor in determining the benefit for older employees
• Benefits for older employees may be higher than under a Defined Contribution Pension Plan
• Plan deficits must be funded solely by employer (advantage to employee)
• Contributions are tax deductible to the employer
• Contributions are not taxable to the plan member
• Employee contributions can be made by payroll deduction
• Past service benefits are possible

Disadvantages of a Defined Benefit Pension Plan:

• Difficult to understand and communicate
• Generally no participation by employees in investment decisions
• Actuarial evaluations of plan required
• Costs to employer are difficult to predict
• Potential for problems with pension surplus and over funding
• Plan deficits must be funded by employer
• Higher administration costs