Which of the following best describes a defined benefit plan?

Which of the following best describes a defined benefit plan?

• A. A plan that provides benefits based on investment returns
• B. A retirement plan where benefits are determined by a formula
• C. A plan that allows employees to set their own retirement contributions
• D. A retirement plan that offers a lump-sum payment upon retirement

Answer: (B)

A defined benefit plan is characterized by a retirement benefit that is calculated using a specific formula, which typically takes into account the employee’s salary and length of service. This means that the ultimate benefit amount to be paid to the employee at retirement is predetermined, providing a clear expectation and assurance of income during retirement. In many cases, this formula might look like a percentage of the employee's final salary multiplied by their years of service, which provides security and predictability for employees. The employer is responsible for managing the assets within the plan, and they must ensure that there are enough funds to meet the future obligations to retirees. The other options describe different types of retirement plans or features that do not align with the characteristics of a defined benefit plan. For example, investment returns influence the benefits in a defined contribution plan rather than a defined benefit plan, and self-directed contributions are not a feature of defined benefit plans, which rely on an employer's funding commitment. Additionally, lump-sum payments may be a distribution option but do not fundamentally define what a defined benefit plan is.

A defined benefit plan is characterized by a retirement benefit that is calculated using a specific formula, which typically takes into account the employee’s salary and length of service. This means that the ultimate benefit amount to be paid to the employee at retirement is predetermined, providing a clear expectation and assurance of income during retirement.

In many cases, this formula might look like a percentage of the employee's final salary multiplied by their years of service, which provides security and predictability for employees. The employer is responsible for managing the assets within the plan, and they must ensure that there are enough funds to meet the future obligations to retirees.

The other options describe different types of retirement plans or features that do not align with the characteristics of a defined benefit plan. For example, investment returns influence the benefits in a defined contribution plan rather than a defined benefit plan, and self-directed contributions are not a feature of defined benefit plans, which rely on an employer's funding commitment. Additionally, lump-sum payments may be a distribution option but do not fundamentally define what a defined benefit plan is.