Services > Defined Benefit Plans

Defined Benefit Plan

A defined benefit plan is one in which the monthly retirement benefit to be provided at retirement is defined in the plan. Benefits are usually defined in terms of the participant's compensation, service, and/or participation and are expressed in terms of a monthly benefit commencing at the participant's normal retirement age (as defined in the plan). For example, a plan that entitles a participant to a monthly pension for his or her life or equal to a certain percentage of monthly compensation is a defined benefit pension plan.

In many cases, the actual payment of the benefit is in a form other than the plan's normal annuity form. These other forms of benefits are called alternate forms and are actuarially equivalent to the normal form of benefit, an example is a lump sum benefit payment of the actuarial present value of the participant’s accrued benefit.

Because there is an annual minimum funding that is required to be made to a Defined Benefit Plan an employer has much less flexibility toward the annual contribution. For this same reason it can allow for much greater contribution than you will find in a Defined Contribution plan.

A defined benefit plan can allow for contributions far exceeding the limitations of profit sharing plans. This makes it an ideal plan for older employees wishing to save large amounts quickly, or for employers wishing to establish a secure traditional retirement plan for their employees.

Cash Balance Defined Benefit Plan

A cash balance plan is a defined benefit plan that simulates a defined contribution plan. Benefits are defined by a formula similar to the allocation formulas in a profit sharing plan with account balances credited with a fixed rate of return and converted to a monthly pension benefit at retirement.

This monthly pension benefit is funded as a traditional defined benefit plan. As with a traditional defined benefit plan, cash balance plans allow the employer to exceed the limitations on contributions seen in profit sharing plans.

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Midwest Pension Actuaries, Inc. | 30680 Twelve Mile Road - Farmington Hills, MI 48334-3803 | 248-539-5000
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