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Defined Benefit Plans
The participant is guaranteed a specified benefit payable at normal retirement age, with reduced benefits payable at an earlier retirement date.
The defined benefit plan was the most popular and common type of pension plan in the United States through the 1980s. Since that time, defined benefits plans have lost groun to the more common type of retirement plan called a defined contribution plan. Defined benefit plans are the only qualified retirement plan to provide employees with a guaranteed retirement benefit.
A defined benefit plan promises a specified monthly benefit at retirement. The plan may state this promised benefit as an exact dollar amount, such as $100 per month at retirement. Or, more commonly, it may calculate a benefit through a plan formula that considers such factors as salary and years of service for example, 1 percent of average salary for the last 5 years of employment for every year of service with an employer. Defined benefit plans are not as common as they once were because defined benefit plans are costly, complex and can face taxes if certain requirements are not met.