The Defined Benefit plan (as its name implies) defines a benefit for an employee upon that employee's retirement. A simple example is a pension plan that provides $100 per month for every year an employee works for a company; with 30 years of employment, that participant would receive $3,000 per month payable for their lifetime. The benefit in a defined benefit pension plan is determined by a formula, which can incorporate the employee's pay, years of employment, age at retirement, and other factors.

The United States Social Security system is an example of a defined benefit pension arrangements, albeit one that is constructed differently than a pension offered by a private employer.

The "cost" of a Defined Benefit plan is not easily calculated, and requires an actuary and actuarial software. However, even with the best of tools, the cost of a defined benefit plan will always be estimated, based on assumptions. These assumptions include the average retirement age and life span of the employees, the interest the pension plan's investments will earn, and the cost of insurance from the Pension Benefit Guarantee Corporation which is predicted to increase in the near future. For this arrangement, the benefit is known but the contribution is unknown even when calculated by a professional.

To find out if this type of plan is suitable for your company, please contact one of our consultants at LNS.