Defined Benefit Plan

Traditional Defined Benefit Plan

Under a defined benefit plan, the employer promises to pay each employee a specified monthly benefit at retirement. The amount of pension is generally determined based on a benefit formula and is dependent on the employee’s length of service and salary history. Typically, traditional defined benefit plans will have a uniform retirement benefit formula that applies to all employees. An employee will receive a retirement benefit defined as a percentage of compensation or a flat dollar amount at retirement age. The employer is responsible for funding the plan to pay the retirement benefits regardless of profits and earnings. The employer is also responsible for investing the assets and bears the investment risk. An actuary calculates the annual contribution requirement to fund future benefits. The benefit is limited to the highest three-year average compensation or $220,000 (for 2018), whichever is less. The limit is adjusted each year to reflect changes in the cost of living index.