What is a defined benefit plan?

A defined benefit plan is characterized by a promise to provide a specified monthly benefit to retirees, which is often based on a formula that considers factors such as years of service and salary history. This structure is designed to offer a reliable stream of income during retirement, allowing employees to have a clearer expectation of their financial needs post-retirement.

In contrast, plans that do not guarantee retirement income will typically depend on investment performance and individual contributions, leading to varying outcomes. Similarly, while some retirement plans might allow for tax-free distributions, this feature is not exclusive to defined benefit plans and can also apply to certain tax-advantaged accounts. Additionally, defined benefit plans are not limited to government employees; many private sector employers also provide these types of plans, although they have become less common over recent years.

The essence of a defined benefit plan lies in the guarantee of a specific benefit amount, making it distinct from other retirement planning options.