A defined benefit plan, often known as a pension plan, is a form of retirement plan provided by a company that promises a certain retirement benefit to employees after they reach retirement age. In a defined benefit plan, the retirement benefit is calculated using a formula that takes into account an employee's income history, years of service, and the plan's specified benefit formula.
Example
An employer provides a defined benefit plan to its employees. According to the proposal, employees will get a retirement benefit equivalent to 1.5% of their average income every year of service. An employee who has worked for 30 years and earns an average of $60,000 would get an annual retirement benefit of $27,000 (1.5% x 30 x $60,000. When the employee reaches the plan's retirement age, he or she might choose to receive the benefit monthly.
