Defined Benefit Plans
What is a Defined Benefit Plan?
Many people are familiar with the mechanics of determining a participant’s benefit and contributions under a Defined Contribution (DC) Plan, such as a 401(k) or Profit Sharing Plan. However, determining benefits and contributions for a Defined Benefit Pension Plan (DB Plan) is more complex and less intuitive. Usually a small company will sponsor a DB Plan in order to obtain higher contributions than can be provided by a DC Plan.
Under a DC Plan, contributions are allocated based on a written allocation formula contained in the Plan document. An account balance, which equals allocated contributions plus investment earnings, is maintained for each participant. A participant’s plan benefit is his vested account balance.
Under a DB Plan, the company promises to give each participant a benefit at retirement. The benefit is calculated using a mathematical formula contained in the Plan document. Typically this formula uses a participant’s average compensation and years of service with the company. Contributions, determined by the actuary are then made to fund the benefit.
Defined Benefit Pension Plans have two advantages over Defined Contribution Plans, namely:
Additional features of a Defined Benefit Pension Plan include:
Pension Review Services custom-designs defined benefit plans in order to meet the objectives of the client. Design features include: