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Employers sometimes offer defined benefit plans. Learn what defined benefits are and what advantages and disadvantages they have.
Defined benefit is a term commonly used to describe payments from pension plans that pay benefits of specific amounts or according to a specific formula.
Most defined benefit plans use a formula that considers how long you’ve worked for the company, what salary you earned and other factors. For example, the plan may pay 1% of your average annual salary for your last 10 years of employment.
The advantage of defined benefit pensions is that the employer is responsible for making sure funds are available to pay retired workers. They set aside the money and make the decisions required to manage the pension funds. Most people feel more secure knowing they’ll have a steady, predictable income after they retire. And some plans adjust payments for increases in the cost of living.
One major disadvantage of defined benefit pension plans is that you don’t have your own account. Your pension may be at risk if your employer goes bankrupt or mismanages the pension fund. To be eligible for the maximum benefits, you may need to work longer than you want to. And if payments are not adjusted for inflation, the amount you receive may not buy the lifestyle you expected.
Example:“Laverne was burned out after 25 years working at the brewery, but she stayed put because she needed 30 years’ service to earn full benefits under the company’s defined benefit pension plan.”
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