Which statement best characterizes a Defined Benefit Plan?

Which statement best characterizes a Defined Benefit Plan?

• A. A pension plan that promises a certain income for life after retirement.
• B. A plan where employees choose investments and bear risk.
• C. A plan that promises annual investment returns.
• D. A plan funded entirely by the government.

Answer: (A)

A Defined Benefit Plan is defined by its guarantee of a specific lifetime retirement income. The benefit is promised in a formula-based amount, typically tied to years of service and earnings, so the retiree knows exactly what they will receive each year for life. Because this benefit is fixed, the plan sponsor assumes the investment risk and must fund the promised payments, regardless of how the plan’s investments perform. This is in contrast to plans where participants choose investments and bear the market risk (defined contribution plans), or where a plan promises whatever investment returns occur (which is not a guaranteed amount). The source of funding isn’t the defining feature—these plans can be employer-funded or government-backed—so the essential idea is the guaranteed lifetime income, not who pays for it.

A Defined Benefit Plan is defined by its guarantee of a specific lifetime retirement income. The benefit is promised in a formula-based amount, typically tied to years of service and earnings, so the retiree knows exactly what they will receive each year for life. Because this benefit is fixed, the plan sponsor assumes the investment risk and must fund the promised payments, regardless of how the plan’s investments perform. This is in contrast to plans where participants choose investments and bear the market risk (defined contribution plans), or where a plan promises whatever investment returns occur (which is not a guaranteed amount). The source of funding isn’t the defining feature—these plans can be employer-funded or government-backed—so the essential idea is the guaranteed lifetime income, not who pays for it.