A defined benefit plan is an employer sponsored retirement plan in which the employer guarantees a fixed retirement income. The actuaries that are managing the company’s pension fund calculate the amount of contribution to be made by the employer to the fund in order to satisfy the requirements of the defined benefit plan. The liability of the payments to be made lies on the employer and he thus bears the risks associated with the volatility in the markets.
The benefit that an employee receives as a result of the plan is a function of several factors like age, compensation, the years of service, growth in salary etc.
It is different from the defined contribution plan in the way that the benefits received under defined contribution plan is subject to the investment decisions of the employee. They are not guaranteed by the employer and may not even make contributions.
The benefits to be received after retirement can take many forms such as onetime payment, periodic payments etc. It is one of the major sources of income for the retirees.
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