Defined Benefit Retirement Plans
A defined benefit pension plan is a type of pension plan in which an employer promises a specified monthly benefit on retirement that is predetermined by a formula based on the employee's earnings history, tenure of service and age, rather than depending on investment returns. It is 'defined' in the sense that the formula for computing the employer's contribution is known in advance.
In the United States, 26 U.S.C. " 414(j) specifies a defined benefit plan to be any pension plan that is not a defined contribution plan where a defined contribution plan is any plan with individual accounts. A traditional pension plan that defines a benefit for an employee upon that employee's retirement is a defined benefit plan.
The most common type of formula used is based on the employee"s terminal earnings. Under this formula, benefits are based on a percentage of average earnings during a specified number of years at the end of a worker"s career. Since the inception of the 401-k Plan, more and more companies are shifting the burden of funding retirement to the employee.