Defined Benefit Plan Definition

Defined benefit plans are more commonly known as traditional pension plans. In a defined benefit plan, an employer typically guarantees a worker a specific lifetime annual retirement income, based on years of service, final rate of pay, age and other factors. The risks of paying for the plan rest entirely with the employer.

Many defined benefit plans permit employees to convert their future income into a lump-sum payment at retirement. Federal pension insurance generally protects retirees who opt for annual income, but workers who opt for lump-sum payoffs are on their own to invest their sums wisely.