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What is a defined benefit pension plan?

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Quick Answer

Defined benefit pension plans are retirement plans that offer specified monthly benefits upon retirement, either fixed dollar amounts or amounts based on a formula with criteria such as salary, age and years worked, reports the U.S. Department of Labor. Employers typically contribute all or most of the funding.

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Full Answer

Defined benefit pension plans allow employers to contribute more than most other types of retirement plans, according to the IRS. Employees appreciate the predictable payouts. Because the employer is the main contributor to the plan, employees are more likely to accumulate substantial retirement savings than with employee-funded plans, states CNN Money. However, employees have no choice in investments, and sometimes the established future payouts are not adjusted to keep up with inflation. Defined benefit pension plans are also more costly and complex to administrate than other retirement plans, as reported by the IRS.

Many large corporations no longer offer defined benefit pension plans to their newer workers, but these plans are efficient pension savings possibilities for small business owners, according to Forbes. The higher contribution limits allow significant amounts of tax-deferred contributions that account holders can withdraw after retirement when their taxable income level is probably lower. Keeping retirement assets in a pension plan protects them from the risks inherent in small businesses. Offering defined benefit pension plans to employees is an attractive part of a benefit package to retain valued workers.

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